Filed by sedaredgar.com - Doral Energy Corp. - Exhibit 10.3






 

 

 

 

$50,000,000 

SENIOR FIRST LIEN SECURED 

CREDIT AGREEMENT 

Among 

Doral Energy Corp., 
a Nevada corporation, 

as Borrower 

and 

Macquarie Bank Limited, 
a bank incorporated under the
laws of Australia, 
in its individual capacity and as Administrative Agent,


and 

the Lenders Party Hereto

_________________________________


 

Dated as of July 29, 2008




TABLE OF CONTENTS 

	ARTICLE I DEFINITIONS 	1 
			 	 
	 	Section 1.1 	Specific Defined Terms 	1 
	 	Section 1.2 	Other Capitalized Terms 	22 
	 	Section 1.3 	Exhibits and Schedules 	22 
	 	Section 1.4 	Amendment of Defined Instruments 	22 
	 	Section 1.5 	References and Titles 	23 
	 	Section 1.6 	Accounting Terms and Determinations 	23 
			 	 
	ARTICLE II THE LOAN FACILITY 	23 
			 	 
	 	Section 2.1 	Maximum Commitment; Development Plan 	23 
	 	Section 2.2 	Availability and Purpose of Revolving Loan Advances 	24 
	 	Section 2.3 	Availability and Purposes of Term Loan Advances 	26 
	 	Section 2.4 	Fees. 	26 
	 	Section 2.5 	LIBOR Breakage Costs 	26 
	 	Section 2.6 	Advance Procedure 	26 
	 	Section 2.7 	Promissory Notes 	28 
	 	Section 2.8 	Interest 	28 
	 	Section 2.9 	Repayment of Principal on Tranche B of the Loan and Interest
      on the Loan 	29 
	 	Section 2.10 	Time and Place of Payments 	30 
	 	Section 2.11 	Borrower Sub-Account 	31 
	 	Section 2.12 	Optional Prepayment of the Loan 	32 
	 	Section 2.13 	Mandatory Prepayment of the Loan 	32 
	 	Section 2.14 	Revenues Remaining in the Borrower Sub-Account 	33 
	 	Section 2.15 	Taxes 	33 
	 	 	 	 
	ARTICLE III SECURITY 	36 
	 	 	 	 
	 	Section 3.1 	Grant of Security Interests 	36 
	 	Section 3.2 	Equipment 	37 
	 	Section 3.3 	Subordination Agreements 	38 
	 	 	 	 
	ARTICLE IV REPRESENTATIONS AND WARRANTIES
      	38 
	 	 	 	 
	 	Section 4.1 	Formation and Existence 	38 
	 	Section 4.2 	Name; Executive Offices 	38 
	 	Section 4.3 	Capitalization; Ownership; Subsidiaries 	38 
	 	Section 4.4 	Authorization; Non-Contravention 	38 
	 	Section 4.5 	Solvency 	39 
	 	Section 4.6 	Omissions and Misstatements 	39 
	 	Section 4.7 	Joint Venture 	39 
	 	Section 4.8 	Commissions; Expenses 	39 
	 	Section 4.9 	Tax Returns 	40 
	 	Section 4.10 	Litigation; Governmental Proceedings 	40 
	 	Section 4.11 	Ownership of Collateral; Interests 	40 
	 	Section 4.12 	Debt 	41 


i 





	 	Section 4.13 	Intellectual Property 	41 
	 	Section 4.14 	Other Leases 	41 
	 	Section 4.15 	Investments 	41 
	 	Section 4.16 	Environmental Matters 	42 
	 	Section 4.17 	Operating Permits and Licenses 	43 
	 	Section 4.18 	Maintenance of Properties 	43 
	 	Section 4.19 	USA PATRIOT Act Representation 	44 
	 	Section 4.20 	Contingent Liabilities 	44 
	 	Section 4.21 	Restrictions on Equipment 	44 
	 	Section 4.22 	Unpaid Bills 	44 
	 	Section 4.23 	Taxpayer Identification 	44 
	 	Section 4.24 	Investment Company 	45 
	 	Section 4.25 	Borrower a Public Company 	45 
	 	Section 4.26 	Other Agreements 	45 
	 	Section 4.27 	Basic Documents 	45 
	 	Section 4.28 	Farmout Agreements and Subject Contracts, Etc 	45 
	 	Section 4.29 	Operating Agreements 	46 
	 	Section 4.30 	No Unusual Agreements 	46 
	 	Section 4.31 	Suspense of Proceeds 	46 
	 	Section 4.32 	Employee Plans 	46 
	 	Section 4.33 	Use of Proceeds 	46 
	 	Section 4.34 	Borrower’s Interests in the Properties 	47 
	 	Section 4.35 	Insurance 	47 
	 	Section 4.36 	No Material Adverse Effect 	47 
	 	Section 4.37 	No Other Interest in the Properties 	47 
	 	Section 4.38 	Conduct of Business Since Formation 	47 
	 	Section 4.39 	Restriction on Liens 	47 
	 	Section 4.40 	Hedging Agreements 	47 
	 	Section 4.41 	Marketing of Production 	48 
	 	Section 4.42 	Deposit Accounts 	48 
	 	Section 4.43 	Labor Matters 	48 
	 	Section 4.44 	Vendor Liens 	48 
	 	Section 4.45 	Eligible Contract Participant 	48 
	 	Section 4.46 	Choice of Law 	48 
	 	Section 4.47 	No Default 	48 
	 	Section 4.48 	Financial Statements 	49 
	 	Section 4.49 	Priority 	49 
	 	Section 4.50 	Terms and Conditions 	49 
	 	Section 4.51 	PSA 	49 
	 	 	 	 
	ARTICLE V FINANCIAL STATEMENTS AND INFORMATION;
      CERTAIN NOTICES TO LENDER 	49 
	 	 	 	 
	 	Section 5.1 	Property Operating Statement 	49 
	 	Section 5.2 	Reports 	50 
	 	Section 5.3 	Quarterly Financial Reports 	50 
	 	Section 5.4 	Certificate of Financial Officer; Compliance 	50 
	 	Section 5.5 	Default Notices 	50 


ii 





	 	Section 5.6 	Reserve Reports 	52 
	 	Section 5.7 	Other Information 	54 
	 	Section 5.8 	Weekly Field Reports and Daily Drilling Reports 	54 
	 	Section 5.9 	Weekly Production Reports 	54 
	 	Section 5.10 	Monthly Field Activity Reports 	54 
	 	Section 5.11 	AFEs 	54 
	 	Section 5.12 	Test Results; Core Analyses; Surveys and Logs 	55 
	 	Section 5.13 	Advance Notice of Operations 	55 
	 	Section 5.14 	Reports Made to a Governmental Authority 	55 
	 	Section 5.15 	Charter Documents 	55 
	 	Section 5.16 	Certificate of Authorized Officer; Hedging Agreements 	55 
	 	Section 5.17 	Certificate of Insurer; Insurance Coverage 	55 
	 	Section 5.18 	Updated Development Plan 	55 
	 	 	 	 
	 ARTICLE VI AFFIRMATIVE COVENANTS  	56 
	 	 	 	 
	 	Section 6.1 	Preservation of Existence 	56 
	 	Section 6.2 	Affiliate Transactions 	56 
	 	Section 6.3 	Compliance with Law 	56 
	 	Section 6.4 	Environmental Matters 	58 
	 	Section 6.5 	Records 	58 
	 	Section 6.6 	Litigation 	59 
	 	Section 6.7 	Damage to Collateral 	59 
	 	Section 6.8 	Solvency 	59 
	 	Section 6.9 	Insurance 	59 
	 	Section 6.10 	Delivery of Instruments 	60 
	 	Section 6.11 	Consultants 	61 
	 	Section 6.12 	Creditors 	61 
	 	Section 6.13 	Inspection 	61 
	 	Section 6.14 	Compliance Opinions and Reports 	62 
	 	Section 6.15 	Operators 	62 
	 	Section 6.16 	Purchasers of Hydrocarbons 	63 
	 	Section 6.17 	Access to Officers, Employees and Agents 	63 
	 	Section 6.18 	Use of Proceeds; Development of Properties 	63 
	 	Section 6.19 	Bonds 	63 
	 	Section 6.20 	Hedging Hydrocarbon Production 	64 
	 	Section 6.21 	Minimum Payments 	64 
	 	Section 6.22 	Post-Closing Title Opinions 	64 
	 	Section 6.23 	Continuing Enterprise 	64 
	 	Section 6.24 	Venue for Debtor Relief Proceedings 	64 
	 	Section 6.25 	Access to Seismic and Geophysical Data 	64 
	 	Section 6.26 	Financial Ratios 	65 
	 	Section 6.27 	Liens on Collateral 	65 
	 	Section 6.28 	Use of Additional Equity 	65 
	 	Section 6.29 	Payment of Taxes, Etc 	65 
	 	Section 6.30 	Equipment 	66 
	 	Section 6.31 	Deposit Account 	66 


iii 





	 ARTICLE VII NEGATIVE COVENANTS	66 
	 	 	 	 
	 	Section 7.1 	Debt 	66 
	 	Section 7.2 	Accounts 	67 
	 	Section 7.3 	Guaranties 	67 
	 	Section 7.4 	Ownership and Business Operations 	67 
	 	Section 7.5 	Liens and Encumbrances 	69 
	 	Section 7.6 	Investments 	69 
	 	Section 7.7 	Subsidiaries and Divestitures 	69 
	 	Section 7.8 	Compliance with Laws 	70 
	 	Section 7.9 	Dividends and Distributions 	70 
	 	Section 7.10 	Modifications 	70 
	 	Section 7.11 	Development Expenditures 	70 
	 	Section 7.12 	Quarterly Minimum Cumulative Net Operating Cash Flow 	70 
	 	Section 7.13 	Quarterly Minimum Cumulative Production Volumes 	70 
	 	Section 7.14 	Other. 	70 
	 	Section 7.15 	Proceeds of Notes 	71 
	 	Section 7.16 	Limitation on Leases 	71 
	 	Section 7.17 	Nature of Business 	71 
	 	Section 7.18 	Deposit Accounts 	72 
	 	Section 7.19 	No Severance Agreements 	72 
	 	Section 7.20 	G&A Expenses 	72 
	 	Section 7.21 	Commodity Deliveries 	72 
	 	 	 	 
	 ARTICLE VIII FURTHER RIGHTS OF LENDERS
      	72 
	 	 	 	 
	 	Section 8.1 	Delivery of Additional Documents 	72 
	 	Section 8.2 	Payments by Lenders 	73 
	 	Section 8.3 	Possession 	73 
	 	Section 8.4 	Indemnification 	73 
	 	Section 8.5 	Removal and Appointment of Operator 	76 
	 	 	 	 
	 ARTICLE IX CLOSING; CONDITIONS PRECEDENT TO CLOSING
      	76 
	 	 	 	 
	 	Section 9.1 	Closing 	76 
	 	Section 9.2 	Conditions to Making the Initial Advance 	76 
	 	Section 9.3 	Additional Conditions Precedent 	79 
	 	 	 	 
	 ARTICLE X EVENTS OF DEFAULT	81 
	 	 	 	 
	 	Section 10.1 	Events of Default 	81 
	 	 	 	 
	 ARTICLE XI REMEDIES OF LENDERS 	84 
	 	 	 	 
	 	Section 11.1 	Remedies 	84 
	 	Section 11.2 	Collateral 	84 
	 	Section 11.3 	Set-Off Rights 	84 
	 	Section 11.4 	Rights Under Operating Agreements 	85 
	 	 	 	 
	 ARTICLE XII ADMINISTRATIVE AGENT 	85 
	 	 	 	 
	 	Section 12.1 	Appointment and Authorization of Administrative Agent 	85 
	 	Section 12.2 	Delegation of Duties 	85 


iv 





	 	Section 12.3 	Liability of Administrative Agent 	86 
	 	Section 12.4 	Reliance by Administrative Agent 	86 
	 	Section 12.5 	Notice of Default 	86 
	 	Section 12.6 	Credit Decision; Disclosure of Information by Administrative
      Agent 	87 
	 	Section 12.7 	INDEMNIFICATION OF ADMINISTRATIVE AGENT 	87 
	 	Section 12.8 	Administrative Agent in its Individual Capacity 	88 
	 	Section 12.9 	Successor Administrative Agent 	88 
	 	Section 12.10 	Administrative Agent May File Proofs of Claim 	89 
	 	Section 12.11 	Collateral Matters 	89 
	 	Section 12.12 	Advance Procedure 	91 
	 	Section 12.13 	Payments 	91 
	 	Section 12.14 	Application of Payments 	92 
	 	Section 12.15 	Liens 	92 
	 	Section 12.16 	Payment Priority 	92 
	 	Section 12.17 	Sharing of Payments by Lenders 	92 
	 	Section 12.18 	Relationship of Lenders 	93 
	 	Section 12.19 	Actions by Administrative Agent 	93 
	 	 	 	 
	 ARTICLE XIII MISCELLANEOUS 	93 
	 	 	 	 
	 	Section 13.1 	Remedies Cumulative 	93 
	 	Section 13.2 	Assignment 	94 
	 	Section 13.3 	Notices 	94 
	 	Section 13.4 	Waivers; Amendments 	96 
	 	Section 13.5 	Confidentiality 	96 
	 	Section 13.6 	Final Agreement 	97 
	 	Section 13.7 	WAIVER OF JURY TRIAL, PUNITIVE DAMAGES, ETC 	97 
	 	Section 13.8 	GOVERNING LAW 	98 
	 	Section 13.9 	No Third-Party Beneficiaries 	98 
	 	Section 13.10 	Fees, Costs and Expenses 	98 
	 	Section 13.11 	Compliance with Law 	99 
	 	Section 13.12 	Power of Attorney; Etc 	99 
	 	Section 13.13 	Obligations are Non-Recourse to Members 	99 
	 	Section 13.14 	Severability 	100 
	 	Section 13.15 	Captions; Headings 	100 
	 	Section 13.16 	Construction 	100 
	 	Section 13.17 	Additional Documents 	100 
	 	Section 13.18 	Counterpart Execution 	100 
	 	Section 13.19 	EXCULPATION PROVISIONS 	100 
	 	Section 13.20 	Obligations Joint and Several 	101 
	 	Section 13.21 	NO OTHER AGREEMENTS; NO PAROL EVIDENCE 	101 


v 




EXHIBITS, ANNEXES AND SCHEDULES

	Exhibits: 	  
	 	 
	Exhibit A 	Description of Properties;
      Interests 
	Exhibit B 	Form of Promissory Note 
	Exhibit C 	Form of Advance Request 
	Exhibit D 	Form of Property Operating
      Statement 
	Exhibit E 	Existing and Approved Purchasers
    
	Exhibit F 	Form of Security Agreement 
	Exhibit G 	Form of Subordination Agreement
    
	Exhibit H 	Notice of Assignment of Proceeds
    
	Exhibit I 	Deposit Account Control Agreement
    
	Exhibit J 	MBL Terms and Conditions of
      Investment Business 
	 	  
	Annexes: 	  
	 	 
	Annex I 	Percentage Share 
	 	  
	Schedules: 	  
	 	 
	Schedule 2.6(d) 	Authorized Signatories on Advance
      Requests 
	Schedule 4.3 	Ownership of Equity Interests of
      Borrower 
	Schedule 4.4(d) 	Consents 
	Schedule 4.8 	Brokerage Fees 
	Schedule 4.10 	Litigation 
	Schedule 4.11(c) 	Agreements to Acquire Interests
      In Hydrocarbons 
	Schedule 4.12 	Debt 
	Schedule 4.16 	Environmental Matters 
	Schedule 4.17 	Operating Permits and Licenses
  
	Schedule 4.20 	Contingent Liabilities 
	Schedule 4.22 	Unpaid Bills 
	Schedule 4.26 	Other Agreements 
	Schedule 4.29 	Operators/Operating Agreements
  
	Schedule 4.32 	Employee Plans 
	Schedule 4.40 	Hedging Agreements 
	Schedule 4.41 	Marketing Contracts 
	Schedule 4.42 	Deposit Accounts 
	Schedule 6.9(c) 	Insurance 
	Schedule 6.19 	Bonds and Qualifications 
	Schedule 7.1(b) 	Authorized Capital Leases 
	Schedule 7.5 	Liens and Encumbrances 
	Schedule 7.12 	Quarterly Minimum Cumulative Net
      Operating Cash Flow 
	Schedule 7.13 	Quarterly Minimum Cumulative
      Production Volumes 






CREDIT AGREEMENT 

          This
$50,000,000 Senior First Lien Secured Loan Credit Agreement (this
“Agreement”) is dated as of July __, 2008, between DORAL ENERGY CORP., a
Nevada corporation, having its principal executive office and place of business
at 111 N. Sepulveda Blvd., Suite 250, Manhattan Beach, California 90266
(“Borrower”) and MACQUARIE BANK LIMITED, a bank incorporated in
accordance with the laws of Australia, with offices at Level 15, 1 Martin Place,
Sydney, New South Wales, 2000 Australia (in its individual capacity,
“MBL”), as administrative agent for the Lenders (in such capacity,
together with its successors in such capacity, “Administrative Agent”)
and the other Lenders party to this Agreement. 

Background: 

          A.     
Borrower and each of the Lenders desire to enter into this Agreement to set
forth the terms and conditions pursuant to which the Lenders will make available
to Borrower a senior secured loan for the purposes set forth in this Agreement.


          B.     
In connection with Lenders making available to Borrower the financial
accommodations described in this Agreement, Borrower will grant to the
Administrative Agent, for the ratable benefit of each of the Lenders, a
first-priority Lien in all of the real and personal property of Borrower subject
only to the Permitted Encumbrances (defined below); and 

          C.      To
further induce Lenders to enter into this Agreement, Borrower shall grant to
Lender or its designee a Net Profits Interest (defined below). 

Agreements: 

          In
consideration of the terms, covenants, provisions and conditions set forth in
this Agreement, Borrower, Administrative Agent and Lenders agree as follows:


ARTICLE I 

  DEFINITIONS

          Section
1.1      Specific Defined Terms. As used herein,
the following terms shall have the following meanings and, as the context
requires, the singular shall include the plural: 

          “Acceptable
Bank” means: 

          (a)     
a bank or financial institution which has a rating for its long-term unsecured
and non credit-enhanced debt obligations of A-1 or higher by Standard &
Poor’s Rating Services or F-1 or higher by Fitch Ratings Ltd or P-1 or higher by
Moody’s Investor Services Limited or a comparable rating from an internationally
recognized credit rating agency; or 

          (b)      any
other bank or financial institution approved by the Administrative Agent. 




          “Adjusted
PV Ratio” means, as of any date, the ratio of (i) the Total Adjusted
Present Value to (ii) Net Debt of Borrower. 

          “Administrative
Agent” means MBL or any successor serving as the Administrative Agent
pursuant to this Agreement. 

          “Administrative
Agent-Related Persons” means the Administrative Agent, together with its
Affiliates, and their respective officers, directors, employees, agents and
attorneys in fact of such Persons. 

          “Advance”
means an advance of funds under the Revolving Loan and the Term Loan, as
applicable, by the Lenders at the Contract Rate pursuant to Article II of
this Agreement. 

          “Advance
Request” means a request for an Advance under the Revolving Loan or the Term
Loan in substantially the form of Exhibit C hereto. 

          “AFE”
means an authorization for expenditure representing an estimate of work to be
performed. AFEs shall not include COPAS overhead or other similar expenses
related to Borrower’s overhead expense. 

          “Affiliate”
means as to any Person (a) any other Person who directly or indirectly controls,
is under common control with, or is controlled by such Person, (b) any director
or officer of such Person or of any Person referred to in clause (a) above, or
(c) if any Person in clause (a) above is an individual, any member of the
immediate family (including parents, spouse and children) of such individual and
any trust whose principal beneficiary is such individual or one or more members
of such immediate family and any Person who is controlled by any such member or
trust. As used in this definition, “control” (including, with its
correlative meanings, “controlled by” and “under common control
with”) means possession, directly or indirectly, of power to direct or cause
the direction of management or policies (whether through ownership of Equity
Interests, by contract or otherwise); provided that, in any event, (i)
any Person who owns directly or indirectly ten percent (10%) or more of the
Equity Interests having ordinary voting power for the election of directors or
other governing body of a corporation or ten percent (10%) or more of the Equity
Interests of any other Person (other than as a limited partner (or member in a
limited liability company in the nature of a limited partner) of such other
Person) will be deemed to control such corporation or other Person, and
(ii) any Subsidiary of Borrower shall be deemed to be an Affiliate of
Borrower. 

          “Agreement”
has the meaning assigned to that term in the introductory paragraph hereof and
includes any amendment, modification, supplement or restatement. 

          “Applicable
Margin” means, (a) with respect to Tranche A, three percent (3.00%) with
respect to a LIBOR Loan and one and one-quarter percent (1.25%) with respect to
a Prime Rate Loan and (b) with respect to Tranche B, six and one-half percent
(6.50%) with respect to a LIBOR Loan and four and three-quarters percent (4.75%)
with respect to a Prime Rate Loan. 

          “Authorized
Officer” has the meaning assigned to that term in Section 5.1(a).


2 




          “Availability
Termination Date” means, unless extended in writing by Administrative Agent,
(a) with respect to Tranche A, the Maturity Date and (b) with respect to Tranche
B, the date that is exactly twenty-four (24) months after the Closing Date. 

          “Bankruptcy
Code” means Title 11 of the United States Code as amended from time to time.


          “Base
Rate Loan” has the meaning assigned to that term in Section 2.8(iii).


          “Basic
Documents” means Leases, Operating Agreements, Hydrocarbon purchase, sales,
exchange, processing, gathering, treatment, compression and transportation
agreements; farmout or farm in agreements; unitization agreements; joint
venture, exploration, limited or general partnership, dry hole, bottom hole,
acreage contribution, purchase and acquisition agreements; area of mutual
interest agreements; salt water disposal agreements, servicing contracts;
easement and/or pooling agreements; surface leases, permits, licenses,
rights-of-way, servitudes, or other interests appertaining to the Properties and
all other executory contracts and agreements relating to the Properties. 

          “Board”
has the meaning assigned to that term in Section 4.33 of this Agreement.


          “BOE”
means Barrels of Oil Equivalent calculated by adding (a) the volume of Crude Oil
sold in barrels to (b) the volume of Natural Gas sold in thousands of cubic feet
(MCF) divided by ten (10). 

          “Borrower”
has the meaning assigned to that term in the first paragraph of this Agreement.


          “Borrower
Sub Account” has the meaning assigned to such term in Section 2.11(a)
of this Agreement. 

          “Borrowing
Base” means, subject to the Maximum Commitment, the loan amount for the
Revolving Loan, as determined by the Administrative Agent from time to time in
accordance with Section 2.2(b). 

          “Borrowing
Base Deficiency” means, and occurs when, the amount by which the outstanding
principal amount of the Revolving Loan exceeds the Borrowing Base in effect at
such time, whether as the result of a redetermination, a scheduled reduction, or
otherwise. 

          “Business
Day” means (a) any day other than a day on which commercial banks are
authorized or required to close in New York, New York, and (b) if such day
relates to a borrowing or continuation of, a payment or prepayment of principal
of or interest on, or a conversion of or into, or the Interest Period for, a
Loan or a notice by Borrower with respect to any such borrowing or continuation,
payment, prepayment, conversion or Interest Period, any day which is also a day
on which dealings in Dollar deposits are carried out in the London interbank
market. 

3 




          “Capital
Leases” means, in respect of any Person, all leases which shall have been,
or should have been, in accordance with GAAP, recorded as capital leases on the
balance sheet of the Person liable (whether contingent or otherwise) for the
payment of rent thereunder. 

          “Cash
Equivalents” means at any time: 

          (a)      certificates
of deposit maturing within one (1) year after the relevant date of calculation
and issued by an Acceptable Bank; 

          (b)      any
investment in marketable debt obligations issued or guaranteed by the government
of the United States of America, or by an instrumentality or agency of any of
them having an equivalent credit rating, maturing within one (1) year after the
relevant date of calculation and not convertible or exchangeable to any other
security; 

          (c)      commercial
paper not convertible or exchangeable to any other security: 

          (i)      for
which a recognized trading market exists; 

          (ii)      which
matures within one (1) year after the relevant date of calculation; and 

          (iii)      which
has a credit rating of either A-1 or higher by Standard & Poor’s Rating
Services or F-1 or higher by Fitch Ratings Ltd or P-1 or higher by Moody’s
Investor Services Limited, or, if no rating is available in respect of the
commercial paper, the issuer of which has, in respect of its long-term unsecured
and non-credit enhanced debt obligations, an equivalent rating; 

          (d)      any
investment in money market funds which 

          (i)      have
a credit rating of either A-1 or higher by Standard & Poor’s Rating Services
or F-1 or higher by Fitch Ratings Ltd or P-1 or higher by Moody’s Investor
Services Limited, 

          (ii)      which
invest substantially all their assets in securities of the types described in
paragraphs (a) to (c) above, and 

          (iii)      can
be converted into cash on not more than thirty (30) days notice. 

          “Cash
Position” means the sum of cash and Cash Equivalents plus accounts
receivable within two (2) months minus accounts payable within two (2) months.


          “CERCLA”
means the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended. 

          “Change
of Control” means the occurrence of any event pursuant to which: 

4 




          (a)      any
Person who has not executed a Subordination Agreement and is not an Affiliate
(either alone or jointly with any other Person) acquires control of Borrower, or
Borrower becomes a Subsidiary of any such Person, or any such Person or group of
Persons acting in concert to gain direct or indirect control of Borrower, in
each case, in a transaction not approved by the Continuing Directors or members,
as applicable; for purposes of this definition, control means: 

          (i)     
the power (whether by way of ownership of shares, proxy, contract, agency or
otherwise) to: 

                    (A)     
cast, or control the casting of, more than thirty-five percent (35%) of the
maximum number of votes that might be cast at a general meeting of Borrower, as
applicable; or 

                    (B)      appoint
or remove all, or the majority, of the directors or other equivalent officers of
Borrower, as applicable; or 

                    (C)      give
directions with respect to the operating and financial policies of Borrower with
which the directors or other equivalent officers of such Borrower is obliged to
comply. 

          (ii)     
the holding beneficially of more than thirty-five percent (35%) of the issued
share capital of Borrower (excluding any part of that issued share capital that
carries no right to participate beyond a specified amount in a distribution of
either profits or capital); and 

          (iii)      “acting
in concert” means, a group of Persons who, pursuant to an agreement or
understanding (whether formal or informal), actively co-operate, through the
acquisition of shares directly or indirectly in Borrower by any of them, either
directly or indirectly, to obtain or consolidate control of Borrower; and 

          (b)     
Either Paul Kirkitelos or H. Patrick Seale cease to be materially involved in
the management of the Borrower and the development of the Properties, and a
replacement reasonably acceptable to the Administrative Agent is not identified
to Administrative Agent within ninety (90) days and is not employed by Borrower
within an additional thirty (30) days. 

          “Charter
Documents” means, as applicable for any Person that is not an individual,
the articles or certificate of incorporation or formation, company agreement,
certificate of limited partnership, regulations, bylaws, partnership or limited
partnership agreement, and all similar documents related to the formation and
governance of that Person, together with all amendments to any of them. 

          “Closing”
means the execution by Borrower and other applicable parties and the delivery to
the Administrative Agent and the Lenders, as applicable, of the Loan Documents
(as hereinafter defined) and all other documents contemplated by this Agreement
and necessary to satisfy the conditions described in Article IX. 

5 




          “Closing
Date” has the meaning assigned to that term in Section 9.1. 

          “Collateral”
means the Properties and all other assets of Borrower covered by the Security
Documents. 

          “Commitment
Fee” has the meaning set forth in Section 2.4. 

          “Continuing
Directors” means (a) any member of the board of directors who was a director
(or comparable manager) of Borrower on the Closing Date, and (b) any individual
who becomes a member of the board of directors after the Closing Date if such
individual was recommended, appointed or nominated for election to the board of
directors by a majority of the continuing directors, but excluding any such
individual originally proposed for election in opposition to the board of
directors in office at the Closing Date in an actual or threatened election
contest relating to the election of the directors (or comparable managers) of
Borrower and whose initial assumption of office resulted from such contest or
the settlement thereof. 

          “Contract
Rate” means a rate per annum equal to (a) the lesser of (i) Prime
Rate plus the relevant Applicable Margin and (ii) the Highest Lawful Rate
or (b) the lesser of (i) the LIBOR Rate plus the relevant Applicable
Margin, and (ii) the Highest Lawful Rate, as selected by Borrower in the
Advance Request or in accordance with Section 2.8. 

          “COPAS”
means the Accounting Procedures for Joint Operations Recommended by the Council
of Petroleum Accountants Societies, then in effect, with respect to onshore or
offshore operations, as applicable, and as applied to properties located in the
same geographical area with the Leases. 

          “Crude
Oil” means all crude oil, condensate and other liquid hydrocarbon
substances. 

          “Current
Assets” means on any date of determination, the consolidated current assets
that would, in accordance with GAAP, be classified as of that date as current
assets, plus any committed but undrawn availability under the Borrowing Base,
less any non-cash amount required to be included in current assets as the result
of the application of GAAP; for the avoidance of any doubt, Current Assets shall
exclude non-cash commodity and interest rate hedges assets and liabilities. 

          “Current
Liabilities” means, on any date of determination, the consolidated
obligations that would, in accordance with GAAP, be classified as of that date
as current liabilities, excluding (a) non-cash obligations under GAAP; for the
avoidance of any doubt Current Liabilities shall exclude non-cash commodity and
interest rate hedges assets and liabilities, and (b) shall exclude the current
portion of long-term Debt, including the Debt hereunder. 

          “Current
Ratio” means, as of any date, the ratio of (i) the Borrower’s Current
Assets to (ii) Borrower’s Current Liabilities on that date. 

          “Debt”
means, for any Person, the sum of the following (without duplication): (a) all
obligations of such Person for borrowed money or evidenced by bonds, bankers’
acceptances, debentures, notes or other similar instruments; (b) all obligations
of such Person (whether contingent or otherwise) in respect of letters of
credit, surety or other bonds and similar 

6 




instruments; (c) all accounts payable and all accrued expenses,
liabilities or other obligations of such Person to pay the deferred purchase
price of property or services; (d) all obligations under Capital Leases; (e) all
obligations under Synthetic Leases; (f) all Debt (as defined in the other
clauses of this definition) of others secured by a Lien on any property of such
Person, whether or not such Debt is assumed by such Person; (g) all Debt (as
defined in the other clauses of this definition) of others guaranteed by such
Person or in which such Person otherwise assures a creditor against loss of the
Debt (howsoever such assurance shall be made) to the extent of the lesser of the
amount of such Debt and the maximum stated amount of such guarantee or assurance
against loss; (h) all obligations or undertakings of such Person to maintain or
cause to be maintained the financial position or covenants of others or to
purchase the Debt or property of others; (i) obligations to deliver
commodities, goods or services, including, without limitation, Hydrocarbons, in
consideration of one or more advance payments, other than Natural Gas balancing
arrangements in the ordinary course of business; (j) obligations to pay for
goods or services whether or not such goods or services are actually received or
utilized by such Person; (k) any Debt of a partnership for which such Person is
liable either by agreement, by operation of law or by a Governmental Requirement
but only to the extent of such liability; (l) Disqualified Capital Stock; and
(m) the undischarged balance of any production payment created by such Person or
for the creation of which such Person directly or indirectly received payment.
The Debt of any Person shall include all obligations of such Person of the
character described above to the extent such Person remains legally liable in
respect thereof notwithstanding that any such obligation is not included as a
liability of such Person under GAAP. 

          “Debtor
Relief Laws” means the Bankruptcy Code and all other applicable liquidation,
conservatorship, bankruptcy, insolvency, rearrangement, moratorium,
reorganization, fraudulent transfer or conveyance or similar debtor relief laws
affecting the rights of creditors generally from time to time in effect. 

          “Default”
means the occurrence of any event which, with the lapse of time or the giving of
notice or both will become an Event of Default hereunder. A Default is
“continuing” if it has not been remedied or waived. 

          “Default
Rate” has the meaning assigned to that term in Section 2.8(i). 

          “Defaulting
Lender” means any Lender that (a) has failed to fund any portion of the Loan
it is required to fund under this Agreement within one (1) Business Day of the
date such funding is required, (b) has otherwise failed to pay over to
Administrative Agent or any other Lender any other amount required to be paid by
it under this Agreement or any other Loan Document within one (1) Business Day
of the date when due, or (c) has been deemed insolvent or become the subject of
a bankruptcy or insolvency proceeding under any Debtor Relief Law. 

          “Defensible
Title” means with respect to each Property, title that (a) entitles the
Person to receive (free and clear of all royalties appearing or not appearing of
record, all overriding royalties and all net profits interests or other burdens
on or measured by production of Hydrocarbons) not less than the Net Revenue
Interest set forth on Exhibit A (or in such other certificate or writing
provided to Lender representing the interests in the Properties, including,
without limitation, any Mortgage) in all Hydrocarbons produced, saved and
marketed from the Property for the productive life of the Property, free and
clear of any Lien other than the 

7 




Permitted Encumbrances and any Liens, which are in favor of
Lender and its Affiliates or are permitted hereunder; and (b) obligates such
Person to bear costs and expenses relating to the maintenance, development and
operation of such Property in an amount not greater than the Working Interest
set forth on Exhibit A for the productive life of such Property. 

          “Deposit
Account Control Agreement” means a Deposit Account Control Agreement among
Borrower, the Administrative Agent and the depository bank(s) substantially in
the form of Exhibit I and covering the deposit accounts set forth in
Schedule 4.42. 

          “Development
Plan” means the comprehensive plan or plans in effect from time to time with
respect to development projects for the Properties and any other expenditure
items which have been approved by Administrative Agent, in its sole discretion.
A Development Plan shall provide for, but not be limited to the location, timing
and estimated costs of Wells to be drilled or recompleted as well as names of
key personnel required to undertake those operations and their associated
responsibilities. The Development Plan may be amended, modified or replaced from
time to time with the written approval of the Administrative Agent. 

          “Disqualified
Capital Stock” means any Equity Interest that, by its terms (or by the terms
of any security into which it is convertible or for which it is exchangeable) or
upon the happening of any event, matures or is mandatorily redeemable for any
consideration other than other Equity Interests (which would not constitute
Disqualified Capital Stock), pursuant to a sinking fund obligation or otherwise,
or is convertible into or exchangeable for Debt or redeemable for any
consideration other than other Equity Interests (which would not constitute
Disqualified Capital Stock) at the option of the holder thereof, in whole or in
part, on or prior to the date that is one (1) year after the earlier of (a) the
Maturity Date and (b) the date on which there are no Advances or other
Obligations hereunder outstanding and all commitments (conditional or otherwise)
of each of the Lenders to make additional Advances are terminated. 

          “EBITDA’
means for Borrower for any period (a) net income, in accordance with GAAP for
such period plus (b) to the extent deducted in determining net income for such
period, interest expense, income taxes and non-cash depreciation and
amortization expense and other non-cash items reducing net income (excluding
non-cash obligations under FAS (133)) for such period, minus (c) all non-cash
income (excluding non-cash obligations under FAS (133)) added to net income for
such period. 

          “Employee
Plan” means an employee pension benefit plan covered by Title IV of ERISA.


          “Engineers”
means an independent petroleum engineering firm selected by Borrower and
approved by the Administrative Agent in writing from time to time, such approval
not to be unreasonably withheld or delayed. 

          “Environmental
and Safety Regulations” means all applicable federal, state or local laws,
ordinances, codes, rules, orders and regulations with respect to any
environmental, pollution, toxic or hazardous waste or health and safety law,
including, without limitation, those promulgated by the United States
Environmental Protection Agency, the Federal Energy Regulatory Commission, the
Department of Energy, the Occupational Safety and Health 

8 




Administration, the Department of the Interior, or any other
Governmental Authority, or any of their predecessor or successor agencies. 

          “Environmental
Laws” shall mean any and all Governmental Requirements and Environmental and
Safety Regulations pertaining to health or the environment in effect in any and
all jurisdictions in which Borrower is conducting or at any time has conducted
business, or where any Property of Borrower is located, including without
limitation, the OPA, CERCLA, RCRA, the Safe Drinking Water Act, as amended, the
Toxic Substances Control Act, as amended, the Superfund Amendments and
Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation
Act, as amended, and other environmental conservation or protection laws. The
term “oil” shall have the meaning specified in OPA, the terms
“hazardous substance” and “release” (or “threatened
release”) have the meanings specified in CERCLA, and the terms “solid
waste” and “disposal” (or “disposed”) have the meanings
specified in RCRA; provided, however, that (a) in the event either
OPA, CERCLA or RCRA is amended so as to broaden the meaning of any term defined
thereby, such broader meaning shall apply subsequent to the effective date of
such amendment and (b) to the extent the laws of the state in which any Property
of Borrower is located establish a meaning for “oil,” “hazardous
substance,” “release,” “solid waste” or “disposal”
which is broader than that specified in either OPA, CERCLA or RCRA, such broader
meaning shall apply to those issues covered by the applicable state laws. 

          “Equipment”
has the meaning assigned to that term in the UCC and includes all surface or
subsurface machinery, goods, equipment, fixtures, inventory, facilities,
supplies or other personal or moveable property of whatsoever kind or nature
(excluding property rented by Borrower or taken to the Properties for temporary
uses) now owned or hereafter acquired by Borrower which are now or hereafter
located on or under any of the lands attributable to the Properties which are
used for the production, gathering, treatment, processing, storage or
transportation of Hydrocarbons and whether or not attributable to the Properties
(together with all accessions, additions and attachments to any thereof),
including, without limitation, all Wells, casing, tubing, tubular goods, rods,
pumping units and engines, Christmas trees, platforms, derricks, separators,
compressors, gun barrels, flow lines, water injection lines, tanks, gas systems
(for gathering, treating and compression), pipelines (including gathering lines,
laterals and trunklines), chemicals, solutions, water systems (for treating,
disposal and injection), power plants, poles, lines, transformers, starters and
controllers, machine shops, tools, storage yards and equipment stored therein,
telegraph, telephone and other communication systems, loading docks, loading
racks, shipping facilities, platforms, well equipment, wellhead valves, meters,
motors, pumps, tankage, regulators, furniture, fixtures, automotive equipment,
forklifts, storage and handling equipment, together with all additions and
accessions thereto, all replacements and all accessories and parts therefor, all
manuals, blueprints, documentation and processes, warranties and records in
connection therewith including, without limitation, any and, to the extent
permitted, all seismic data, geological data, geophysical data and
interpretation of any of the foregoing, all rights against suppliers,
warrantors, manufacturers, sellers or others in connection therewith, and
together with all substitutes for any of the foregoing. 

          “Equity
Equivalents” means with respect to any Person any rights, warrants, options,
convertible securities, exchangeable securities, indebtedness or other rights,
in each case exercisable for or convertible or exchangeable into, directly or
indirectly, Equity Interests of such person or securities exercisable for or
convertible or exchangeable into Equity Interests of 

9 




such person, whether at the time of issuance or upon the
passage of time or the occurrence of some future event. 

          “Equity
Interests” means shares of capital stock, partnership interests, membership
interests in a limited liability company, beneficial interests in a trust or
other equity ownership interests in a Person, and any warrants, options or other
rights entitling the holder thereof to purchase or acquire any such Equity
Interest. 

          “ERISA”
means the Employee Retirement Income Security Act of 1974, as amended, and
related rules and regulations. 

          “Event
of Default” has the meaning assigned to that term in Section 10.1.


          “Facility
Termination Date” means the earliest of (i) the Maturity Date,
(ii) the date on which Borrower has paid and discharged in full all
Obligations (as hereinafter defined) to the Administrative Agent and each of the
Lenders (other than indemnity obligations and similar obligations that survive
the termination of this Agreement) and the Lenders have no further obligations
to make Advances hereunder, or (iii) the date on which the Administrative
Agent has notified Borrower of the acceleration of payment of all Obligations
hereunder because of the occurrence and continuance of an Event of Default. 

          “Financial
Accounting Standards Board” means the board by this name recognized by the
Securities and Exchange Commission of the United States of America. 

          “First
Reserve Report Effective Date” means December 31, 2008. 

          “G&A
Cap” means (a) for the period ending March 31, 2009, One Hundred Twenty-Five
Thousand Dollars ($125,000) per calendar month and (b) thereafter, ten percent
(10%) of Net Operating Cash Flow per calendar month. 

          “G&A
Expenses” means the general and administrative expenses of Borrower,
including capitalized general and administrative expenses, calculated in
accordance with GAAP, (excluding all non-cash charges and performance-based
compensation pursuant to a plan approved by Administrative Agent in writing).


          “GAAP”
means generally accepted accounting principles recognized as such by the
Financial Accounting Standards Board (or generally recognized successor)
consistently applied and maintained throughout the period indicated and
consistent with applicable laws, except for changes mandated by the Financial
Accounting Standards Board or any similar accounting authority of comparable
standing. If any change in any accounting principle or practice is required by
the Financial Accounting Standards Board (or generally recognized successor) in
order for such principle or practice to continue as a generally accepted
principle or practice, all financial reports or statements required hereunder or
in connection herewith may be prepared in connection with such change, but all
calculations and determinations to be made hereunder may be made in accordance
with such change only if Borrower and the Administrative Agent agree to do so.
Whenever any accounting term is used herein which is not otherwise defined, it
shall be interpreted in accordance with GAAP. 

10 




          “Governmental
Authority” means the government of the United States of America, any other
nation or any political subdivision thereof, whether state, local or tribal, and
any agency, authority, instrumentality, regulatory body, court, central bank or
other entity exercising executive, legislative, judicial, taxing, regulatory or
administrative powers, jurisdiction or functions of or pertaining to government
over the Borrower or any other Obligor, the Properties, the Administrative Agent
or any Lender or any of their respective Affiliates. 

          “Governmental
Requirements” means, with respect to any Person, any law, statute, code,
ordinance, order, determination, rule, regulation, judgment, decree, injunction,
franchise, permit, certificate, license, authorization or other directive or
requirement, whether now or hereinafter in effect, including, without
limitation, Environmental Laws, energy regulations and occupational, safety and
health standards or controls, of any Governmental Authority applicable to such
Person. 

          “Hanson
Properties” means the Properties set forth on Exhibit A which are
being acquired from J. Warren Hanson d/b/a Hanson Energy pursuant to the
Purchase and Sale Agreement. 

          “Hazardous
Materials” means and include (i) all elements or compounds that are
contained in the list of hazardous substances adopted by the United States
Environmental Protection Agency and the list of toxic pollutants designated by
the United States Congress or the Environmental Protection Agency or under any
Hazardous Substance Laws (as hereinafter defined), and (ii) any
“hazardous waste,” “hazardous substance,” “toxic
substance,” “regulated substance,” “pollutant” or
“contaminant” as defined under any Hazardous Substance Laws. 

          “Hazardous
Substance Laws” means CERCLA, RCRA, the Federal Water Pollution Control Act,
as amended, 33 U.S.C. 1251 et seq., the Toxic Substances Control Act, 15 U.S.C.
2601 et seq., the Hazardous Liquid Pipeline Safety Act of 1979, as amended, 40
U.S.C. 2001 et seq., the Federal Insecticide, Fungicide, and Rodenticide Act, 7
U.S.C. 136 et seq., the Federal Clean Air Act, 42 U.S.C. 7401 et seq., any so
called federal, state or local “superfund” or “super lien”
statute, and any other applicable federal, state or local law, rule, regulation
or ordinance related to the remediation, clean up or reporting of environmental
pollution or contamination or imposing liability (including strict liability) or
standards of conduct concerning any Hazardous Materials. 

          “Hedging
Agreement” means: 

          (a)      Any
Swap Agreement and any and all rate swap transactions, basis swaps, credit
derivative transactions, forward rate transactions, commodity swaps, commodity
options, forward commodity contracts, equity or equity index options, swaps or
options, bond or bond price or bond index swaps or options or forward bond or
forward bond price or forward bond index transactions, interest rate options,
forward foreign exchange transactions, cap transactions, floor transactions,
collar transactions, currency swap transactions, cross-currency rate swap
transactions, currency options, spot contracts or any other similar transactions
or any combination of any of the foregoing (including any options to enter into
any of the foregoing), whether or not any such transaction is governed by or
subject to any Master Agreement (as defined in paragraph (b) below); and 

11 




          (b)     
any and all transactions of any kind, and the related confirmations, which are
subject to the terms and conditions of, or governed by, any form of master
agreement published by the International Swaps and Derivates Association, Inc.
or any International Foreign Exchange Master Agreement (any such master
agreement, together with any related schedules, a “Master Agreement”),
including any such obligations or liabilities under any Master Agreement. 

          “Highest
Lawful Rate” means, with respect to each Lender, the maximum nonusurious
interest rate, if any, that at any time or from time to time may be contracted
for, taken, reserved, charged or received on the Promissory Note or on other
Obligations under laws applicable to such Lender which are presently in effect
or, to the extent allowed by law, under such applicable laws which may hereafter
be in effect and which allow a higher maximum nonusurious interest rate than
applicable laws allow as of the date hereof. 

          “Hydrocarbons”
means all Crude Oil and Natural Gas. 

          “Indemnified
Party or Parties” has the meaning assigned to that term in Section
8.4(a). 

          “Indemnitee”
has the meaning assigned to such term in Section 8.4(b). 

          “Interest
Coverage Ratio” means, as of any date, the ratio of (i) Borrower’s
EBITDA for the four (4) most recent fiscal quarters commencing after the date
hereof to (ii) Borrower’s aggregate interest expense for all Debt
(including Debt under this Agreement) for the same period, provided,
however, for the first fiscal quarter commencing after the date hereof,
such calculation shall be based upon the Borrower's EBITDA for such first fiscal
quarter multiplied by four (4); for the second fiscal quarter commencing after
the date hereof, such calculation shall be based upon the Borrower's EBITDA for
the aggregate of the first two such fiscal quarters multiplied by two (2); and
for the third fiscal quarter commencing after the date hereof, such calculation
shall be based upon the Borrower’s EBITDA for the aggregate of the first three
such fiscal quarters multiplied by one and one-third (1.33) . 

          “Interest
Payment Date” means the last day of each calendar month. 

          “Interest
Period” means as to each Advance of the Loan, the period commencing on the
date of the Advance and ending on the date that is thirty (30), sixty (60) or
ninety (90) days thereafter, as selected by Borrower in an Advance Request or
Selection Notice (it being agreed that such interest periods are equivalent to
the one (1), two (2) or three (3) month periods shown on the Reuters
“LIBO” page); provided that: 

          (a)     
any Interest Period that would otherwise end on a day that is not a Business Day
shall be extended to the next succeeding Business Day unless such Business Day
falls in another calendar month, in which case such Interest Period shall end on
the next preceding Business Day; 

          (b)      any
Interest Period that begins on the last Business Day of a calendar month (or on
a day for which there is no numerically corresponding day in the calendar month
at the end of such Interest Period) shall end on the last Business Day of the
calendar month at the end of such Interest Period; and 

12 




          (c)     
no Interest Period shall extend beyond the Maturity Date. 

          “Investment”
means, for any Person: (a) the acquisition (whether for cash, property, services
or securities or otherwise) of Equity Interests of any other Person or any
agreement to make any such acquisition (including, without limitation, any
“short sale” or any sale of any securities at a time when such securities
are not owned by the Person entering into such short sale); (b) the making of
any deposit (other than deposits in the Project Account, including the Borrower
Sub-Account) with, or advance, loan or other extension of credit to, any other
Person (including the purchase of property from another Person subject to an
understanding or agreement, contingent or otherwise, to resell such property to
such Person, but excluding any such advance, loan or extension of credit having
a term not exceeding ninety (90) days representing the purchase price of
inventory or supplies sold by such Person in the ordinary course of business);
or (c) the entering into of any guarantee of, or other contingent obligation
(including the deposit of any Equity Interests to be sold) with respect to, Debt
or other liability of any other Person and (without duplication) any amount
committed to be advanced, lent or extended to such Person. 

          “Lease”
or “Leases” means, whether one or more, (i) those certain oil and
gas leases, mineral estates, and all other mineral rights or interests set forth
in the descriptions of the Properties attached as Exhibit A hereto, and
any other interests in the Leases or any other lease of real property, whether
now owned or hereafter acquired by Borrower, and any extension, renewals,
corrections, modifications, elections or amendments (such as those relating to
unitization) of any such Lease or Leases, or (ii) other oil, gas and/or
mineral leases or other interests pertaining to the Properties, whether now
owned or later acquired, which may now or hereafter be made subject to a Lien in
favor of the Administrative Agent or any Lender under any of the Security
Documents and any extension, renewals, corrections, modifications, elections or
amendments (such as those relating to unitization) of any such lease or leases.


          “Lenders”
means the Persons listed on Annex I, any Person that shall have become a
party hereto pursuant to Section 13.2 (assignment), other than any such
Person that ceases to be a party hereto pursuant to Section 13.2
(assignment). 

          “Lender
Participation Documents” means, collectively, (i) any participation
and intercreditor agreement evidencing any transaction (each a “Lender
Participation Transaction”) under which either of the initial Lenders
identified in this Agreement assigns to any other Person an interest in the
Promissory Note and the rights of such Lender under this Agreement and the other
Loan Documents, (ii) any Promissory Note issued by Borrower to any other
Person pursuant to any Lender Participation Transaction and (iii) all
other documents, agreements, instruments and writings at any time delivered in
connection with a Lender Participation Transaction. 

          “Liabilities
and Costs” has the meaning assigned to such term in Section 12.7.


          “LIBOR
Breakage Costs” means all costs, expenses or losses incurred by any Lender
as the result of any prepayment of an Advance on a day prior to the day on which
the applicable Interest Period ends (whether voluntary, mandatory, automatic, by
reason of acceleration, or otherwise), including any loss or expense arising
from the liquidation or reemployment of funds 

13 




obtained by it to maintain the Loan or from fees payable to
terminate the deposits from which such funds were obtained. Borrower shall also
pay customary administrative fees charged by any Lender in connection with the
foregoing. 

          “LIBOR
Loan” has the meaning assigned to that term in Section 2.8(iii). 

          “LIBOR
Market” means the London interbank offered interest rate market created by
major London clearing banks for deposits in USD. 

          “LIBOR
Rate” means, in respect of an Interest Period and the Advance related
thereto: 

          (a)     
if not less than two rates are displayed on Reuters page “LIBO” at or
around 11:00 a.m. (London time) on the second Business Day before the first day
of the period for USD loans over the period which is closest to that period, the
arithmetic mean (expressed as a rate per cent per annum and rounded up to five
decimal places) of not less than two of those rates selected by the
Administrative Agent; or 

          (b)     
if less than two (2) rates for USD loans over that period are displayed on
Reuters page “LIBO” at or around that time, the arithmetic mean
(expressed as a rate per cent per annum and rounded up to five decimal places)
of the offer rates quoted to the Administrative Agent by not less than two banks
which ordinarily display rates on Reuters page “LIBO” on application by
Administrative Agent for USD loans equal to that amount over the period equal to
that period; or 

          (c)      if
the Administrative Agent is unable to determine a rate under paragraph (a) or
(b) because an insufficient number of rates are displayed (in the case of
paragraph (a)) or the Administrative Agent is unable to obtain the
necessary number of quotes (in the case of paragraph (b)), the rate
(expressed as a rate per cent per annum and rounded up to five decimal places)
specified in good faith by the Administrative Agent at or around that time
having regard, to the extent possible, to the offer rates otherwise quoted to
the Administrative Agent for USD loans equal to that amount over the period
equal to that period at or around that time. 

          “Lien”
means any interest in property (real or personal) securing an obligation owed
to, or a claim by, a Person other than the owner of the Property, whether such
interest is based on the common law, statute or contract, and whether such
obligation or claim is fixed or contingent, and including but not limited to (a)
the lien or security interest arising from a mortgage, encumbrance, pledge,
security agreement, conditional sale or trust receipt or a lease, consignment or
bailment for security purposes or (b) production payments and the like payable
out of oil and gas properties and the Properties. The term “Lien” shall
include easements, servitudes, restrictions, permits, conditions, covenants,
exceptions or reservations. For the purposes of this Agreement, Borrower shall
be deemed to be the owner (to the extent of its interest therein) of any
Property which it has acquired or holds subject to a conditional sale agreement,
or leases under a financing lease or other arrangement pursuant to which title
to the Property has been retained by or vested in some other Person in a
transaction intended to create a financing. 

14 




          “Loan”
shall mean the Revolving Loan (Tranche A) or the Term Loan (Tranche B), as
applicable. 

          “Loan
Documents” means this Agreement, the Promissory Note, the Security
Documents, the Lender Participation Documents, any Swap Agreements, the Net
Profits Overriding Royalty Interest Conveyance and all other agreements,
certificates, documents, instruments and writings at any time delivered in
connection herewith or therewith (exclusive of term sheets, commitment letters,
correspondence and similar documents used in the negotiation hereof, except to
the extent the same contain information about Borrower or its Affiliates,
properties, business or prospects). 

          “Material
Adverse Effect” means any effect, event or matter: 

          (a)      which
is materially adverse to: 

                    (i)      the
  business, assets, liabilities, ownership, management or condition (financial
  or otherwise) of Borrower; or

                    (ii)     
the ability of Borrower to perform any payment obligations under any Loan
Documents; or 

          (b)     
which could reasonably be expected to result in any Security Document not
providing to the Administrative Agent the Liens and/or security interests in the
assets expressed to be secured under that Security Document. 

          “Material
Changes” has the meaning assigned to such term in Section 12.19. 

          “Maturity
Date” means July 30, 2011; provided, however, that should
Borrower fail to submit to Administrative Agent a Development Plan acceptable to
Administrative Agent, in Administrative Agent’s sole discretion, within one
hundred twenty (120) days following Closing, then “Maturity Date” shall mean
July 30, 2009. 

          “Maximum
Commitment” means (a) with respect to the Revolving Loan, the lesser of
(i) Twenty-Five Million Dollars ($25,000,000) and (ii) the
Borrowing Base, and (b) with respect to the Term Loan, Twenty-Five Million
Dollars ($25,000,000). 

          “MBL”
has the meaning assigned to that term in the first paragraph of this Agreement.


          “MBOE”
means thousands of Barrels of Oil Equivalent. 

          “MMCF”
and “MCF” means one million cubic feet and one thousand cubic feet,
respectively. 

          “Mortgage”
means a mortgage, deed of trust, assignment of production, security agreement
and financing statement and act of mortgage and security agreement securing
future advances executed by Borrower and granting a first and prior Lien to or
for the benefit of Lender in the Properties described therein subject only to
the Permitted Encumbrances, and otherwise in 

15 




form and substance satisfactory to Administrative Agent, as the
same may be modified, amended or supplemented pursuant to the terms of this
Agreement. 

          “Natural
Gas” means all natural gas, and any natural gas liquids and all products
recovered in the processing of natural gas (other than condensate) including,
without limitation, natural gasoline, casinghead gas, iso-butane, normal butane,
propane and ethane (including such methane allowable in commercial ethane)
produced from or attributable to the Properties. 

          “Net
Debt” means, as of any date, an amount equal to the sum of, without
duplication, (i) the Total Committed Obligations plus (ii)
the total amount of Borrower’s other Debt classified as long-term Debt under
GAAP, plus (iii) any Cash Equivalent deficit or minus any
Cash Equivalent surplus. 

          “Net
Profits Interest” means the overriding royalty interest calculated on the
net profit of the Properties conveyed by Borrower to Lender or its respective
designees pursuant to the Net Profits Overriding Royalty Interest Conveyance.


          “Net
Profits Overriding Royalty Interest Conveyance” means the Net Profits
Overriding Royalty Interest Conveyance executed by Borrower in favor of Lender
or its respective designees from time to time, in form and substance
satisfactory to Lender. 

          “Net
Operating Cash Flow” means, on a cash accounting basis, Borrower’s gross
cash receipts from sales of Production Volumes and all other cash receipts from
operations from whatever source (including, without limitation, if applicable,
cash payments received under any Hedging Agreement), less the following
expenses to be paid from this cash: (a) lease operating expenses; (b) production
taxes; (c) other state and federal taxes paid in cash (including taxes based on
the income of Borrower and approved by Lenders, and so long as the payment of
such taxes will not result in an Event of Default), (d) payments made with
respect to Hedging Agreements (if applicable); and (e) amounts paid by Borrower
to acquire and/or maintain any bonds or letters of credit securing plugging and
abandonment and other performance obligations with respect to the Properties as
set forth in Schedule 6.19; provided, however, the Net
Operating Cash Flow does not include cash receipts or disbursements attributable
to third-party Working Interest or third-party Royalty Interest ownership, and
net profits interests owned by third parties that are not Affiliates of
Borrower. 

          “Net
Revenue Interest” means, with respect to any Property, the decimal or
percentage share of Hydrocarbons produced and saved from or allocable to such
Property, after deduction of Royalty Interests and other burdens on or paid out
of such production. 

          “Obligations”
means and include all loans and advances (including the Loan), debts,
liabilities, obligations, covenants, duties and amounts owing or to be owing by
Borrower or any other Obligor to the Administrative Agent, any Lender or any
Affiliate of a Lender, of any kind or nature, present or future, whether or not
evidenced by any note, guaranty, letter of credit or other instrument, arising
directly or indirectly, under the Loan Documents (including but not limited to
the Swap Agreement), and all renewals, extensions and/or rearrangements of any
of the foregoing. The term includes, but is not limited to, all interest,
reasonable charges, expenses, consultants’ and attorneys’ fees and any other sum
payable by Borrower under the Loan 

16 




Documents and all Related Costs. Provided,
however, for purposes of the definition of “Obligations” only,
Loan Documents do not include the Net Profits Overriding Royalty Interest
Conveyance. 

          “Obligor”
means Borrower and Guarantor. 

          “OPA”
means the Oil Pollution Act of 1990, as amended. 

          “Operating
Agreement” means (a) any joint operating agreements covering or relating to
any one or more of the Properties and (b) any subsequently executed joint
operating agreement covering or relating to any one or more of the Properties
that is approved in writing by Administrative Agent. 

          “Operator”
means with respect to the Properties, Borrower and any other operators,
including contract operators, of the Properties approved by the Administrative
Agent in writing pursuant to Sections 6.15 and 8.5. The Operators
for each of the Properties as of the date of execution of this Agreement are
identified on Schedule 4.29. 

          “Other
Taxes” has the meaning assigned to such term in Section 2.15(b). 

          “Payment
Date” means, prior to the repayment in full and final satisfaction of all
Obligations (other than indemnity obligations and similar obligations that
survive the termination of this Agreement), the twentieth (20th) day of each
month, commencing on October 20, 2008. 

          “Percentage
Share” means, with respect to any Lender, the percentage of the total
Commitments represented by such Lender’s Commitment as such percentage is set
forth on Annex I, as modified from time to time to reflect assignments
permitted by Section 13.2. 

          “Permitted
Encumbrances” means (a) Liens for property taxes and assessments or
governmental charges or levies related to Borrower’s property, provided
that payment thereof is not past due unless being contested in good faith by
appropriate action promptly initiated and diligently concluded and for which
appropriate reserves as may be required under GAAP, have been made; (b)
(i) Liens on cash and Cash Equivalents securing the performance of bids,
tenders, trade or government contracts, leases (other than Capitalized Leases)
or licenses or to secure statutory obligations, surety, performance or appeal
bonds, letters of credit or other Liens of like general nature incurred in the
ordinary course of business and not in connection with the borrowing of money or
the acquisition of inventory or other property and (ii) Liens, other than
any Liens imposed by ERISA, arising in the ordinary course of business or
incidental to the ownership of Properties and assets (including Liens in
connection with worker’s compensation, unemployment insurance and other like
laws, carrier’s, mechanic’s, builder’s, suppliers’, materialmen’s, repairmen’s,
vendors’, warehousemen’s, architects’, attorneys’ Liens, and Liens of royalty
owners, first purchasers and of operators and non-operators arising under
Operating Agreements) for sums not past due or being contested in good faith by
appropriate action promptly initiated and diligently conducted, if such reserves
as may be required by GAAP, have been made; (c) survey exceptions, issues with
regard to the merchantability of title, easements or reservations, or rights of
others for rights-of-way, servitudes, utilities and other similar purposes, or
zoning or other restrictions as to the use of real properties, which could not
reasonably be expected to have a Material Adverse Effect; (d) Liens permitted by
the Administrative Agent in 

17 




writing; (e) Liens on Properties in respect of judgments or
awards, the Debt with respect to which is permitted hereunder; (f) Liens against
specific Equipment securing Debt permitted hereunder; and (g) the specific
exceptions and encumbrances affecting one or more of the Properties as described
in the Mortgages and/or the title reports, summaries and opinions delivered to
the Administrative Agent prior to the Closing Date, BUT ONLY INSOFAR as those
exceptions and encumbrances are valid and subsisting and are enforceable against
the particular Lease which is made subject to those exceptions and encumbrances.


          “Person”
means an individual, corporation, partnership, limited liability company, joint
venture, trust or unincorporated organization, joint stock company or other
similar organization, Governmental Authority or any other legal entity, whether
acting in an individual, fiduciary or other capacity. 

          “Personal
Property” means all personal property of every kind, whether now owned or
later acquired, including all goods (including Equipment), documents, accounts,
chattel paper (whether tangible or electronic), money, deposit accounts, letters
of credit and letter-of-credit rights (without regard to whether the letter of
credit is evidenced by a writing), documents, securities and all other
investment property, supporting obligations, any other contract rights
(including all rights in transportation agreements, processing agreements,
delivery agreements and seismic agreements related to the Properties) or rights
to the payment of money, insurance claims and proceeds, all general intangibles
(including all payment intangibles and rights to seismic and other geophysical
data) and all permits, licenses, books and records related to the Properties or
the business of Borrower as it relates to the Properties in any way whatsoever.


          “Prime
Rate” means, with respect to any period, the greater of (i) the prime
rate of interest specified by the Wall Street Journal and (ii) the
Federal Funds Rate plus 0.50% per annum, in each case changing from time to time
as and when that rate changes. The Prime Rate is a reference rate and does not
necessarily represent the lowest or best rate actually available. 

          “Pro
Rata Share” means, when determined for each Lender, a fraction (stated as a
percentage), the numerator of which is the outstanding principal amount of such
Lender’s Promissory Note, and the denominator of which is the outstanding
principal amount of all Promissory Notes. 

          “Production
Volumes” means, with respect to the Properties or any portion thereof, the
product of Borrower’s Net Revenue Interest multiplied by gross Hydrocarbons
produced from the Properties or any portion thereof, as applicable. 

          “Project
Account” means the account identified in Section 2.10(a) or as
otherwise specified in writing to Borrower by Administrative Agent. 

          “Promissory
Note” means, collectively, one or more promissory notes substantially in the
form of Exhibit B executed by Borrower and delivered to each of the
Lenders (including any successors to and assignees of the initial Lenders
identified in this Agreement) pursuant to Section 2.7, together with all
renewals, extensions, increases and rearrangements. 

          “Property”
or “Properties” means, collectively, the property of Borrower, including
without limitation, the Properties described on Exhibit A, attached
hereto as the same may be 

18 




amended from time-to-time, and includes, without limitation,
all Leases and all other real and personal property of Borrower, whether now
owned or later acquired and without regard to whether such property is related
to any of the Leases, including but not limited to all Personal Property and all
Basic Documents associated therewith. For the purposes of this Agreement,
Borrower will be deemed to be the owner of any Property which it has acquired or
holds subject to a conditional sale agreement, or leases under a financing lease
or other arrangement pursuant to which title to the Property has been retained
by or vested in some other Person in a transaction intended to create a
financing. “Properties” shall include all real property acquired by
Borrower, directly or indirectly, from and after the Closing Date, whether or
not described on Exhibit A hereto. 

          “Property
Operating Statement” means a monthly statement substantially in the form
Exhibit D, to be prepared and delivered by Borrower to the Administrative
Agent in accordance with Section 5.1. 

          “Proved
Developed Non-Producing Present Value” or “PDNP Present Value” means
the present value discounted at ten percent (10%) of future net revenues
attributable to all PDNP Reserves from the Properties calculated based on a
Reserve Report prepared in accordance with Section 5.6. 

          “Proved
Developed Producing Present Value” or “PDP Present Value” means the
present value discounted at ten percent (10%) of future net revenues
attributable to all PDP Reserves from the Properties calculated based on a
Reserve Report prepared in accordance with Section 5.6. 

          “Proved
Reserves” has the meaning given that term in the definitions promulgated by
the Society of Petroleum Evaluation Engineers and the World Petroleum Congress
as in effect at the time in question; “Proved Developed Producing
Reserves” or “PDP Reserves” means Proved Reserves which are
categorized as both “Developed” and “Producing” in such
definitions; “Proved Developed Non-Producing Reserves” or “PDNP
Reserves” means Proved Reserves which are categorized as both
“Developed” and “Non-Producing” in such definitions; and
“Proved Undeveloped Reserves” or “PUD Reserves” means Proved
Reserves which are categorized as “Undeveloped” in such definitions. 

          “Proved
Undeveloped Present Value” or “PUD Present Value” means the present
value discounted at ten percent (10%) of future net revenues attributable to all
PUD Reserves from the Properties calculated based on a Reserve Report prepared
in accordance with Section 5.6. 

          “PSA”
means that certain Purchase and Sale Agreement dated April 25, 2008, between
Borrower and J. Warren Hanson d/b/a Hanson Energy, as the same has been amended
pursuant to [list amendments and we need to see them]. 

          “Purchasers”
means all Persons, including those parties listed on Exhibit E or
otherwise approved in writing by Administrative Agent (such approval or
disapproval not to be unreasonably delayed), who purchase Hydrocarbons
attributable or allocable to Borrower’s Net Revenue Interest in the Properties.


          “RCRA”
means the Resource Conservation and Recovery Act of 1976, as amended. 

19 




          “Recipient
Parties” has the meaning assigned to such term in Section 2.11(b).


          “Related
Costs” means the reasonable and documented fees and out-of-pocket expenses
of counsel for the Administrative Agent and consultants for the Administrative
Agent and such other reasonable and documented out-of-pocket, third-party
expenses incurred by the Administrative Agent in connection with the due
diligence, negotiation and preparation of documents relating to the Loan and
execution, delivery and filing and/or recording of the Loan Documents together
with any amendments, supplements or modifications thereto or administration or
enforcement thereof. 

          “Related
Parties” means, with respect to any specified Person, such Person’s
Affiliates and the respective directors, officers, employees, agents and
advisors (including attorneys, accountants and experts) of such Person and such
Person’s Affiliates. 

          “Release”
means Hazardous Materials that are pumped, spilled, leaked, disposed of,
emptied, discharged or otherwise released into the environment in violation of
applicable laws. 

          “Remedial
Work” has the meaning assigned to such term in Section 6.4(a). 

          “Required
Lenders” means, when determined, Lenders holding at least a majority of the
of the Total Committed Obligations; provided that, the holdings of any
Defaulting Lender shall be excluded in the determination of Required Lenders for
purposes of this definition. 

          “Reserve
Report” has the meaning assigned to that term in Section 5.6(a). 

          “Revolving
Loan” has the meaning assigned to such term in Section 2.1(a). 

          “Royalty
Interest” means an expense-free interest retained by a mineral lessor in a
Lease, an overriding royalty reserved by or conveyed to a Person or any other
expense-free right to receive production or revenues from a Property or Lease.


          “Security
Agreements” means any security agreement executed by Borrower or other
Person, as debtor, in favor of the Administrative Agent, as secured party for
the benefit of each of the Lenders, substantially in the form and substance as
attached as Exhibit F and otherwise satisfactory to the Administrative
Agent in its sole and absolute discretion. 

          “Security
Documents” means this Agreement, the Mortgages, the Security Agreements, the
Subordination Agreements, financing statements, the Deposit Account Control
Agreement and any other agreement or writing evidencing any assignment, Lien,
encumbrance or security interest executed in favor of the Administrative Agent,
any Lender or any of their respective Affiliates in or on the Collateral and any
other documents relevant thereto; provided, however, that
“Security Documents” shall not include the Net Profits Overriding Royalty
Interest Conveyance. 

          “Selection
Notice” has the meaning set forth in Section 2.8(iii). 

          “Solvent”
means that, as of the date on which a Person’s solvency is to be measured: (a)
the fair saleable value of its assets is in excess of the total amount of its
liabilities (including 

20 




income tax liabilities) as they become absolute and matured;
and (b) it is able to meet its debts as they mature. 

          “Special
Damages” has the meaning assigned to such term in Section 13.7. 

          “Subordination
Agreement” means, with respect to all Affiliates of Borrower and any other
Person designated by the Administrative Agent, a subordination agreement
substantially in the form of Exhibit G. 

          “Subsidiary”
means any Person of which fifty percent (50%) or greater of the issued and
outstanding securities having ordinary voting power for the election of
directors, members or general partners is owned, directly or indirectly, by such
Person and/or one or more of its subsidiaries. 

          “Swap
Agreement” means any ISDA Master Agreement and the Schedule thereto executed
between Borrower and MBL, or any other Lender or any Affiliate of a Lender,
together with any confirmation of trade thereunder and (unless any such
requirements are waived in writing by MBL in its sole and absolute discretion)
in accordance with MBL’s “Terms and Conditions of Investment Business” attached
as Exhibit J and “Client Registration Form (Corporate Account)”. 

          “Synthetic
Leases” means, in respect of any Person, all leases which shall have been,
or should have been, in accordance with GAAP, treated as operating leases on the
financial statements of the Person liable (whether contingently or otherwise)
for the payment of rent thereunder and which were properly treated as
indebtedness for borrowed money for purposes of U.S. federal income taxes, if
the lessee in respect thereof is obligated to either purchase for an amount in
excess of, or pay upon early termination an amount in excess of, eighty percent
(80%) of the residual value of the property subject to such operating lease upon
expiration or early termination of such lease. 

          “Taxes”
has the meaning assigned to that term in Section 2.15. 

          “Taxing
Authorities” means any Governmental Authority that has the power to impose
taxes upon Borrower or any of the Collateral. 

     “Term Loan” has the
meaning assigned to that term in Section 2.1(a). 

          “Total
Adjusted Present Value” means an amount, based on the most recent Reserve
Report, equal to the sum of (i) the PDP Present Value plus
(ii) the PDNP Present Value plus (iii) the PUD Present
Value; provided, however, if the sum of PDNP Present Value
plus the PUD Present Value exceeds fifty percent (50%) of the amount that
would otherwise be the Total Adjusted Present Value, the Total Adjusted Present
Value will be an amount equal to twice the PDP Present Value; and
provided further that, in calculating the Total Adjusted Present Value,
the Administrative Agent will, in consultation with Borrower, make appropriate
adjustments for material purchases, sale and discoveries of Hydrocarbon reserves
by Borrower since the effective date of the last Reserve Report. 

21 




          “Total
Committed Obligations” means, as of any date, the total monetary Obligations
owing to Lenders under this Agreement and the Swap Agreement (including any
Advances that Lenders have unconditionally committed to make but has not yet
funded). 

          “Tranche”
means, as applicable, any of the Advances under Tranche A or Tranche B. 

          “Tranche
A” means Advances made on the Revolving Loan. 

          “Tranche
B” has the meaning assigned to that term in Section 2.3 and includes
Tranche B-1 and Tranch B-2. 

          “Tranche
B-1” has the meaning assigned to that term in Section 2.3(a). 

          “Tranche
B-2” has the meaning assigned to that term in Section 2.3(b). 

          “UCC”
means the Uniform Commercial Code presently in effect in the State of Texas or
other applicable jurisdiction. 

          “USA
PATRIOT Act” means the Uniting and Strengthening America by Producing
Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act
of 2001, Pub. L. 707-56, as amended, and regulations promulgated thereunder as
in effect from time to time. 

          “USD”
or “$” or “Dollars” shall mean currency of the United States of
America. 

          “Well”
means any existing oil or gas well, salt water disposal well, injection well,
non-potable water supply well located on or related to the Properties or any
well which may hereafter be drilled and/or completed on any of the Properties,
or any facility or equipment in addition to or replacement of any such well.


          “Working
Interest” means the property interest which entitles the owner thereof to
explore and develop certain land for oil and gas production purposes, whether
under an oil and gas lease or unit, a compulsory pooling order or otherwise.


          Section
1.2      Other Capitalized Terms. Capitalized
terms not otherwise defined in Section 1.1 shall have the meanings given
them elsewhere in this Agreement. 

          Section
1.3      Exhibits and Schedules. All exhibits
and schedules attached to this Agreement are part of this Agreement for all
purposes. 

          Section
1.4      Amendment of Defined Instruments.
Unless the context otherwise requires or unless otherwise provided herein, the
terms defined in this Agreement which refer to a particular agreement,
instrument or document also refer to and include all renewals, extensions,
modifications, amendments and restatements of such agreement, instrument or
document. Nothing contained in this Section 1.4 will be construed to
authorize any renewal, extension, modification, amendment or restatement. 

22 




          Section
1.5      References and Titles. All references
in this Agreement to exhibits, schedules, articles, sections, subsections and
other subdivisions refer to the exhibits, schedules, articles, sections,
subsections and other subdivisions of this Agreement unless expressly provided
otherwise. Titles appearing at the beginning of any subdivisions are for
convenience only, do not constitute any part of those subdivisions and will be
disregarded in construing the language contained in those subdivisions. The
words “this Agreement,” “this instrument,” “herein,”
“hereof,” “hereby,” “hereunder” and words of similar import
refer to this Agreement as a whole and not to any particular subdivision unless
expressly so limited. The phrases “this section” and “this
subsection” and similar phrases refer only to the sections or subsections of
this Agreement in which those phrases occur. The word “or” is not
exclusive; the word “including” (in its various forms) means
“including without limitation.” Pronouns in masculine, feminine and
neuter genders shall be construed to include any other gender, and words in the
singular form shall be construed to include the plural and vice versa, unless
the context otherwise requires. The word “will” shall be construed to
have the same meaning and effect as the word “shall.” Unless the context
requires otherwise (a) any reference herein to any law shall be construed as
referring to such law as amended, modified, codified or reenacted, in whole or
in part, and in effect from time to time, (b) any reference herein to any Person
shall be construed to include such Person’s successors and assigns (subject to
the restrictions contained herein), (c) with respect to the determination of any
time period, the word “from” means “from and including” and
the word “to” means “to and including.” No provision of this
Agreement or any other Loan Document shall be interpreted or construed against
any Person solely because such Person or its legal representative drafted such
provision. 

          Section
1.6      Accounting Terms and
Determinations. Unless otherwise specified herein, all accounting terms used
herein shall be interpreted, all determinations with respect to accounting
matters hereunder shall be made, and all financial statements and certificates
and reports as to financial matters required to be furnished to the Lenders
hereunder shall be prepared, based on the combined and consolidating financial
statements of the Borrower in accordance with GAAP, applied on a consistent
basis. 

ARTICLE II 

  THE LOAN FACILITY

          Section
2.1      Maximum Commitment; Development
Plan.

                              (a)      Maximum
Commitment. Each Lender severally agrees, subject to the terms and conditions of
this Agreement, prior to the applicable Availability Termination Date to make
available to Borrower (i) a senior secured revolving loan (the “Revolving
Loan”) and (ii) a senior subordinated term loan (the “Term Loan”) in
accordance with such Lender’s Percentage Share for the purposes set forth in and
in accordance with such Lender’s Percentage Share not to exceed in the Maximum
Commitment. Borrower acknowledges that Lenders do not intend to advance Borrower
any amount which would at any point in time exceed the Maximum Commitment;
provided, however, if the obligations of Borrower under the Loan exceed the
Maximum Commitment, all obligations will nevertheless constitute Obligations
under this Agreement and be entitled to the benefit of all of the Administrative
Agent’s Liens on the Collateral. All monetary Obligations (other than
Obligations that may continue past the Maturity 

23 




Date under the terms of a Swap Agreement) will be fully due and
payable on the Maturity Date. Amounts repaid in respect of the Term Loan may not
be reborrowed. 

                              (b)      Development
Plan. Borrower shall submit to Administrative Agent an initial Development Plan
acceptable to Administrative Agent, in Administrative Agent’s sole discretion,
within one hundred twenty (120) days following Closing. 

          Section
2.2      Availability and Purpose of Revolving
Loan Advances. Beginning on the Closing Date and continuing through the
Availability Termination Date: 

                              (a)      Revolving
Loan .

          (i)      The
initial Borrowing Base available under the Revolving Loan is Two Million Five
Hundred Thousand Dollars ($2,500,000) and may be used exclusively to pay for a
portion of the acquisition price of the Hanson Properties, the payment of fees
incurred pursuant to this Agreement and Related Costs. 

          (ii)      Notwithstanding
any Borrowing Base availability, Borrower shall not, without the prior written
consent of the Administrative Agent, in its sole and absolute discretion, be
permitted to utilize any portion of the Revolving Loan for any other purpose
other than (A) with respect to the initial Advance under the Revolving Loan as
permitted by Section 2.2(a)(i), the reimbursement of the Borrower for the
acquisition price of the Hanson Properties or (B) with respect to all subsequent
Advances under the Revolving Loan, paying down outstanding balances in Tranche B
or funding costs and expenses associated with activities set forth in the then
current Development Plan and included in an AFE, in each instance under the
preceding clause (B) only to the extent such costs and expenses are approved in
writing by the Administrative Agent in its sole and absolute discretion. 

                         (b)     
Borrowing Base. 

          (i)      The
initial Borrowing Base in effect as of the Closing Date is as set forth in
Section 2.2(a)(i) above. 

          (ii)      Subject
to Section 2.2(e) below, the Borrowing Base shall be re-determined not
less than every six (6) months (based upon the most recent Reserve Report)
pursuant to the following provisions of this Section 2.2(b). However, if
Borrower changes its fiscal year, then the next re-determination date shall be
no later than seventy-five (75) days following Borrower’s new fiscal year end
date. On or before each February 15 and August 15, until the Maturity
Date, the Borrower shall furnish to Administrative Agent a Reserve Report (with
“effective dates” of January 31 and July 31 respectively), which shall set
forth, effective as of the effective dates, as applicable, the Proved Reserves
attributable to the Properties. Each Reserve Report shall be a complete report
prepared by Engineers or, if agreed in writing by Administrative Agent, by
Borrower’s in-house engineers, relating to the Proved Reserves attributable to
the Properties in accordance with Section 5.6. For the avoidance of
doubt, within thirty (30) days following receipt of each such Reserve Report,
Administrative Agent shall, in its sole discretion, make a determination of the


24 




Borrowing Base which shall become
effective upon written notification from Administrative Agent to Borrower until
the effective date of the next redetermination as set forth in this Section
2.2(b). 

          (iii)      Administrative
Agent is not required to consider any Proved Reserves attributable to the
Properties for inclusion in the Borrowing Base if, in Administrative Agent’s
reasonable opinion, Administrative Agent, on behalf of Lenders, does not have a
first priority security interest or mortgage Lien on such Properties. In no
event will the Borrowing Base exceed Twenty-Five Million Dollars ($25,000,000).


          (iv)      Subject
to Section 2.2(e) below, Administrative Agent shall determine the
Borrowing Base in accordance with its customary lending practices based on the
maximum Revolving Loan amount that may be supported by the Properties and
Borrower acknowledge, for purposes of this Agreement, such determination by
Administrative Agent as being the maximum Revolving Loan amount that may be
supported by the Properties. In making any redetermination of the Borrowing
Base, Administrative Agent shall apply consistently the parameters and other
credit factors then generally being utilized by Administrative Agent for
Borrowing Base redeterminations for Lender’s similarly situated borrowers. The
Borrower and Administrative Agent acknowledge that (A) due to the uncertainties
of the Hydrocarbon extraction process, the Properties are not subject to
evaluation with a high degree of accuracy and are subject to potential rapid
deterioration in value, and (B) for this reason and the difficulties and
expenses involved in liquidating and collecting against the Properties,
Administrative Agent’s determination of the maximum Revolving Loan amount that
may be supported by the Properties contains an equity cushion, which equity
cushion is acknowledged by Borrower as essential for the adequate protection of
Administrative Agent and Lenders. 

                         (c)      Unscheduled
Redeterminations. In addition to the redetermination of the Borrowing Base
described in Section 2.2(b)(ii), Borrower may initiate a redetermination
of the Borrowing Base at any other time as it so elects by specifying in writing
to Administrative Agent the date by which Borrower will furnish to
Administrative Agent a Reserve Report in accordance with Section 5.6 and
the date by which such redetermination is requested to occur and Lender may also
initiate such a redetermination in its sole discretion; provided,
however, that Borrower and Lender may each initiate only two such
unscheduled redeterminations each between scheduled redetermination dates. 

                         (d)      Termination
and Reduction of Commitment. Upon at least five (5) Business Days prior written
notice to Administrative Agent, Borrower may at any time permanently terminate,
or from time to time permanently reduce, the Maximum Commitment;
provided, however, that: 

          (i)      each
such reduction or termination must be in an amount equal to an integral multiple
of One Hundred Thousand Dollars ($100,000); 

          (ii)      such
reduction or termination may not cause the Maximum Commitment to be less than
the Obligations outstanding at such time; 

25 




          (iii)      on
the date of any termination or reduction of the Maximum Commitment, Borrower
shall prepay so much of the Obligations (up to the amount by which the Maximum
Commitment pertaining thereto is so terminated or reduced) as shall be necessary
in order that the sum of the principal amount of the Obligations outstanding
will not exceed the Maximum Commitment applicable thereto following such
termination or reduction, and 

          (iv)      such
reduction or termination may not thereafter be increased or restored. 

                         (e)     
Notwithstanding anything in this Section 2.2 or elsewhere in this
Agreement to the contrary, the Borrowing Base will be increased to an amount in
excess of the initial Borrowing Base set forth in Section 2.2(a)(i) above
only in the sole and absolute discretion of the Administrative Agent and each of
the Lenders. 

          Section
2.3      Availability and Purposes of Term Loan
Advances. Beginning on the Closing Date and continuing through the
applicable Availability Termination Date, up to Twenty-Five Million Dollars
($25,000,000) of the Term Loan (“Tranche B”) may be used as follows: 

                         (a)     
up to Two Million Eight Hundred Thousand Dollars ($2,800,000) of Tranche B
(“Tranche B-1”) shall be utilized to pay a portion of the purchase price
for the Hanson Properties, for the payment of fees incurred pursuant to this
Agreement and for general corporate purposes; and 

                         (b)     
up to Twenty-Two Million Two Hundred Thousand Dollars ($22,200,000) of Tranche B
(“Tranche B-2”) may be used, in Lender’s sole discretion, to (i) satisfy
a Borrowing Base Deficiency, (ii) for the development of the Properties pursuant
to the Development Plan or (iii) for the payment of fees incurred pursuant to
this Agreement.. 

          Section
2.4      Fees.

                         (a)      Arranger
Fee. Borrower shall pay to MBL a non-refundable fee equal to Fifty-Three
Thousand Dollars ($53,000) (which represents 1% of the initial Advance of
$5,300,000), on the Closing Date, which is fully earned on the date paid. 

                         (b)     
Advance Fee. In connection with each Advance after the initial Advance, Borrower
will pay to the Administrative Agent for the benefit of the Lenders a
non-refundable fee equal to one percent (1%) of any such Advance.
Notwithstanding the above, Borrower will not be required to pay any Advance Fee
on Advances (or portions of Advances) made to pay the Advance Fee itself. 

          Section
2.5      LIBOR Breakage Costs. Borrower shall
pay to any Lender all LIBOR Breakage Costs immediately upon demand by such
Lender. LIBOR Breakage costs shall be a part of the Obligations for all
purposes. 

          Section
2.6      Advance Procedure.

26 




                         (a)      Advance
Requests. In connection with each Advance under the Loan other than the initial
Advance which shall be funded at Closing, Borrower will submit to the
Administrative Agent a single written Advance Request substantially in the form
of Exhibit C not later than 12:00 p.m. Houston, Texas time, at least
three (3) Business Days prior to the date on which the Advance, if approved, is
to be made; provided, however, that Lenders shall have no obligation to make any
Advance unless and until all of the conditions set forth in this Article
II and the applicable conditions in Article IX have been satisfied or
waived in writing by the Administrative Agent. Each Advance Request must be
accompanied by copies of all approved AFEs defined in the Development Plan, and
invoices or other supporting documentation reasonably satisfactory to the
Administrative Agent evidencing the amounts to be paid out of the Advance. Each
AFE delivered to the Administrative Agent will detail, on a line item basis, all
amounts Advanced to date by each Lender under that AFE and the amount requested
under the Advance Request. Unless the Administrative Agent provides Borrower
with written notice during such three (3) Business Day period describing in
detail objections to the Advance Request, then the Administrative Agent will be
deemed to have acknowledged such Advance Request and process the Advance
contained therein. Unless otherwise agreed to in writing by Administrative
Agent, all Advances to Borrower will be made to an account or accounts specified
in Schedule 4.42. 

                         (b)      Approval
of AFEs. Notwithstanding Section 2.6(a) above, as supporting
documentation to the initial Development Plan or any revised Development Plan,
Borrower shall submit to the Administrative Agent an AFE (including all
supporting documentation) for written approval at least fifteen (15) days in
advance of the date it will be seeking to make the first Advance with respect to
that AFE. No Advance will be made for the development of the Properties or the
completion of any Well unless that Advance relates to an AFE that has been
approved in writing by the Administrative Agent in its sole and absolute
discretion; provided that, to the extent any AFE conforms to a
Development Plan approved in writing by the Administrative Agent in accordance
with this Agreement, the Administrative Agent’s approval of such AFE in
connection with a subsequent Advance Request will not be unreasonably withheld
or delayed. In no event will any Lender have any obligation to make an Advance
(i) in excess of one hundred ten percent (110%) of the AFE that was the
subject of the relevant Advance Request approved by the Administrative Agent or
(ii) if the making of the Advance (or any part of it) will result in the
amount actually Advanced under such AFE to exceed the overall availability cap
under the applicable tranche. Notwithstanding this Section 2.6(b), no
Lender will have any obligation to make any Advance unless and until all of the
conditions set forth in this Article II and the applicable conditions set
forth in Article IX have been satisfied. 

                         (c)      Minimum
Advance. The minimum amount of any Advance will be One Hundred Thousand Dollars
($100,000) except to the extent a lesser amount remains available under the Loan
or under a particular tranche of the Loan. 

                         (d)      Authorized
Signatories. Schedule 2.6(d) lists the Persons authorized to make an
Advance Request on behalf of Borrower and an original signature of each Person.
Unless specified on Schedule 2.6(d), only one signature from a Person
listed on Schedule 2.6(d) is required for an Advance Request. 

27 




          Section
2.7      Promissory Notes. Borrower’s
obligation to repay the Loan will be evidenced by Promissory Notes in favor of
each Lender. The Advances made by each Lender shall be evidenced by a single
Promissory Note, dated, in the case of (i) any Lender party hereto as of
the date of this Agreement, or (ii) any Lender that becomes a party
hereto pursuant to an assignment, as of the effective date of the assignment,
payable to the order of such Lender in a principal amount equal to its
commitment as in effect on such date, and otherwise duly completed. In the event
that any Lender’s commitment increases or decreases for any reason, the Borrower
shall deliver or cause to be delivered on the effective date of such increase or
decrease (and upon the surrender of any then existing Promissory Note evidencing
the same obligation), a new Promissory Note payable to the order of such Lender
in a principal amount equal to its commitment after giving effect to such
increase or decrease, and otherwise duly completed. The date, amount, interest
rate of each Advance made by each Lender, and all payments made on account of
the principal thereof, shall be recorded by such Lender on its books for its
Promissory Note, and, prior to any transfer, may be endorsed by such Lender on a
schedule attached to such Promissory Note or any continuation thereof or on any
separate record maintained by such Lender. Failure to make any such notation or
to attach a schedule shall not affect any Lender’s or Borrower’s rights or
obligations in respect of such Advances or affect the validity of such transfer
by any Lender of its Promissory Note. 

          Section
2.8      Interest.

          (i)      The
Advances comprising the Revolving Loan and Term Loan shall bear interest at the
applicable Contract Rate on the outstanding borrowed and unpaid principal amount
of the Loan for the period commencing on the date of each Advance until all
monetary Obligations are paid in full in accordance with this Agreement. Upon
the occurrence and during the continuation of an Event of Default, the rate of
interest applicable to the Promissory Note will be equal to the lesser of
(i) the Highest Lawful Rate and (ii) four percent (4.00%) over the
applicable Contract Rate (the “Default Rate”). In addition, if any
principal of or interest on any Advance, fee, Related Costs or other amount
payable by Borrower or any other obligor hereunder or under any other Loan
Document is not paid when due, whether at stated maturity, upon acceleration or
otherwise, such overdue amount shall bear interest, after as well as before
judgment, at a rate per annum equal to the Default Rate. 

          (ii)      All
interest will be computed on the actual number of days elapsed over a year
comprised of three hundred sixty (360) days. Interest will be due and payable in
immediately available funds monthly in arrears on the Interest Payment Date and
in full on the Facility Termination Date. 

          (iii)     
Borrower may select the Contract Rate by indicating such on an applicable
Advance Request or by delivering a selection notice substantially in accordance
with this section (the “Selection Notice”) to the Administrative Agent at
least three (3) Business Days prior to the end of the current Interest Period.
If Borrower elects the LIBOR Rate, then such Advance shall be considered a
“LIBOR Loan;” if Borrower selects the Prime Rate then such Advance
shall be considered a “Base Rate Loan.” 

28 




          (iv)     
An Interest Period shall not extend beyond the Maturity Date. 

          (v)      Each
Interest Period shall start on the date of the Advance or (if already made) on
the last day of its preceding Interest Period. 

          (vi)      Continuation
Options. Subject to the provisions made in this Section
2.8(vi) Borrower may elect to continue all or any part of any LIBOR Loan
beyond the expiration of the then current Interest Period relating thereto by
giving advance notice as provided in Section 2.8(iii) to Administrative
Agent of such election, specifying the amount of such LIBOR Loan to be
continued. In the absence of such a timely and proper election, Borrower shall
be deemed to have elected to convert such LIBOR Loan to a Base Rate Loan
pursuant to Section 2.8(vii). All or any part of any LIBOR Loan may be
continued as provided herein, provided that (i) any continuation of any
such LIBOR Loan shall be (as to each LIBOR Loan as continued for an applicable
Interest Period) in amounts of at least One Hundred Thousand Dollars ($100,000)
or any whole multiple of One Hundred Thousand Dollars ($100,000) in excess
thereof. 

          (vii)      Conversion
Options. Borrower may elect to convert all or any part of any LIBOR Loan on
the last day of the then current Interest Period relating thereto to a Base Rate
Loan by giving advance notice to the Administrative Agent of such election.
Subject to the provisions made in this Section 2.8(vii), Borrower may
elect to convert all or any part of any Base Rate Loan at any time and from time
to time to a LIBOR Loan by giving advance notice as provided in Section
2.8(iii) to Administrative Agent of such election. All or any part of any
outstanding LIBOR Loan or Base Rate Loan, as applicable, may be converted as
provided herein, provided that (i) any conversion of any Base Rate Loan
into a LIBOR Loan shall be (as to each such loan into which there is a
conversion for an applicable Interest Period) in amounts of at least One Hundred
Thousand Dollars ($100,000) or any whole multiple of One Hundred Thousand
Dollars ($100,000) in excess thereof. 

          (viii)      There
may be no more than six (6) LIBOR Loans outstanding at any one time. 

          (ix)      The
applicable interest rate shall be determined by Administrative Agent, and its
determination shall be conclusive absent manifest error and binding upon the
parties hereto. 

          Section
2.9      Repayment of Principal on Tranche B of the
Loan and Interest on the Loan.

                         (a)      On
each Payment Date, commencing on September 20, 2008, Borrower will, subject to
Section 2.11(a), pay to Administrative Agent for the ratable benefit of
each Lender, one hundred percent (100%) of the positive Net Operating Cash Flow
(if there is no Event of Default, less the G&A Cap) to be applied as set
forth in Section 2.9(d). All interest on the outstanding principal
balance of Tranche A and Tranche B from the Closing Date through August 31, 2008
will be due and payable on September 20, 2008. On each subsequent Payment Date,
interest will be due and payable on the outstanding principal balance of the
Loan for the 

29 




immediately preceding calendar month, and Borrower will pay to
Lender one hundred percent (100%) of the Net Operating Cash Flow (if there is no
Event of Default, less the G&A Cap) to be applied against the entire
outstanding balance of the Loan (including accrued interest on the Loan) in the
order set forth in Section 2.9(d). In no event shall payments made to
Lender on any Payment Date be less than the interest accrued and payable on the
outstanding balance of the Loan through the applicable Payment Date and the
principal amounts due and payable on the Term Loan. 

                         (b)      Net
Operating Cash Flow will be calculated by Lender based on the Property Operating
Statement. Borrower shall prepare and deliver the Property Operating Statement
to Lender no later than forty (40) days after each month. The Property Operating
Statement will be substantially in the form of Exhibit D and will detail,
without limitation, Borrower’s Production Volumes revenue, lease operating
expenses, production taxes and other state and federal taxes paid, G&A
Expenses (as limited by Section 7.20), cash payments made with respect to
any Hedging Agreements and any other cash receipts with respect to each Property
comprising the Properties relating to production and operations for the month
prior to the immediately preceding month. The first Property Operating Statement
is due on October 10, 2008 and will detail income and expenses for the August
production month commencing August 1, 2008 through August 31, 2008. 

                         (c)      All
principal and accrued interest outstanding on the Loan shall be due and payable
on the Maturity Date. 

                         (d)      Payments
will be applied first to unpaid fees, LIBOR Breakage Costs and Related Costs,
which Borrower is obligated for under the Loan Documents, second to accrued
interest on the Loan, third to principal on the Term Loan, and if there is a
mandatory prepayment under Section 2.13, or the receipt of insurance
proceeds under Section 2.13(b)(v), fourth to principal on the Revolving
Loan. The amounts of any prepayments will be applied first to principal on the
Loan and second to accrued interest on the Loan. 

          Section
2.10      Time and Place of Payments.

                         (a)     
Project Account. To the extent not satisfied by debits from the Borrower
Sub-Account pursuant to Section 2.11(a), all payments (whether of
principal, interest, fees, Related Costs, indemnities or otherwise) to be made
by Borrower to the Administrative Agent, for the ratable benefit of the Lenders,
will be made by wire transfer in immediately available funds not later than
11:00 a.m., Houston, Texas, time on each Payment Date to Administrative Agent
at: 

Account: 
Bank of New York 
New
York, NY 10004 
ABA # 021000018 

30 




Favour: 
Macquarie Bank Limited –
OBU Sydney 
Sydney 
A/C
No.:           8900055375

Chips UID:       236386

Reference:         Doral Energy
Corp. 

(the “Project Account”) or to
any other account the Administrative Agent may designate in writing to Borrower
from time to time. 

                         (b)     
Business Days. If any payment to be made under this Agreement falls due on a day
that is not a Business Day, the payment will be payable on the next succeeding
Business Day. 

          Section
2.11      Borrower Sub-Account.

                         (a)      Collection
of All Funds. Borrower shall direct and cause all Purchasers of Hydrocarbons,
Operators, all other obligors and, if applicable, all payors of Royalty
Interests, net profit interests and production payment interests and any other
customers of Borrower to deposit all payments of any nature due and owing to
Borrower directly into the Project Account, and, if Borrower shall nonetheless
receive any such funds, it shall promptly (but, in any event, by the following
Business Day) deposit them in the Project Account; provided,
however, that Purchasers of Hydrocarbons listed on Exhibit E or
Operators may make distributions directly to Royalty Interest owners and other
third party payees. The Administrative Agent will establish a sub-account (the
“Borrower Sub-Account”) on its internal books and records and credit to
the Borrower Sub-Account all collected funds which constitute payments referred
to in the preceding sentence at the time the amount to be credited has been
identified to the Administrative Agent’s reasonable satisfaction. Borrower
hereby irrevocably authorizes the Administrative Agent to debit the Borrower
Sub-Account for the payment of all Obligations when due in accordance with
Section 2.9. 

                         (b)     
Amounts Owed to Other Interest Owners; Taxes. Notwithstanding anything to the
contrary in this Section 2.11(b), any amounts deposited into the Project
Account owing to (i) third party Working Interest and Royalty Interest holders;
(ii) Governmental Authorities for taxes or payments measured by production, and
(iii) amounts specified as items (a) through (e) in the definition of “Net
Operating Cash Flow” will be released by the Administrative Agent to Borrower
upon receipt of a certificate from Borrower detailing the amounts and the party
to be paid so that Borrower may return those amounts to the third party Working
Interest and Royalty Interest holders and Governmental Authorities (throughout
this paragraph, all such interest holders and Governmental Authorities are,
collectively, the “Recipient Parties”) and pay the amounts specified as
items (a) through (e) in the definition of “Net Operating Cash Flow”;
provided, however, the Administrative Agent will, at its option
and upon notice to Borrower, have the right, but not the obligation, to make
payments directly to the Recipient Parties upon the occurrence and during the
continuation of an Event of Default; and provided, further, if the
Administrative Agent elects not to make these payments directly, the
Administrative Agent shall, upon the request of Borrower, release sufficient
funds to allow Borrower to make the payments described in Section 2.11(b)
to the Recipient Parties. Except as 

31 




provided in the preceding sentence, the Administrative Agent
may, upon the occurrence and during the continuation of an Event of Default,
apply all of Borrower’s funds in the Borrower Sub-Account against all due and
unpaid Obligations. The Administrative Agent will have the right to undertake
audit procedures during normal business hours and upon prior notice to
periodically confirm that the payments described in this Section 2.11(b)
have been made by Borrower. 

          Section
2.12      Optional Prepayment of the Loan.
Borrower will have the right to prepay the Loan, in whole or in part at any time
without penalty or premium, except for LIBOR Breakage Costs resulting from such
prepayment. Any such option and prepayment will not reduce or terminate the
Maximum Commitment unless Borrower gives notice of its election to do so
pursuant to Section 2.2(d). 

          Section
2.13      Mandatory Prepayment of the Loan. 

                         (a)      Proceeds
from Sale of Collateral. Unless the Required Lenders otherwise consent in
writing, Borrower shall promptly pay to the Administrative Agent one hundred
percent (100%) of all net proceeds from the sale of any Collateral (excluding
sales of Hydrocarbons in the ordinary course of business and the sale of
Equipment pursuant to the Security Agreement) provided, however,
so long as there is no Event of Default, Borrower may retain up to Fifty
Thousand Dollars ($50,000) per sale up to an aggregate of One Hundred Thousand
Dollars ($100,000) calculated on an annual calendar year basis. The preceding
sentence will not be deemed to be a consent by the Administrative Agent or any
Lender to any sale. All amounts paid by Borrower to the Administrative Agent
under this Section 2.13 will be immediately applied as a prepayment of
the Loans in accordance with Section 2.9(d). 

                         (b)      Mandatory
Payment due to Loan Excess. If at any time a Borrowing Base Deficiency
exists (whether as a result of a redetermination of the amount of the Borrowing
Base in accordance with Section 2.2(b) or otherwise), then Borrower shall
be obligated within ten (10) Business Days of receipt of written notice thereof
by the Lender to the Borrower, to deliver to the Administrative Agent a written
response indicating which of the following actions the Borrower intends to take
to remedy the Borrowing Base Deficiency (and the failure of Borrower to deliver
such election notice within such ten (10) Business Day-period or of the Borrower
to perform the actions chosen to remedy such Borrowing Base Deficiency within
the time period therefore shall constitute an Event of Default): 

          (i)      within
thirty (30) days of receipt by the Borrower of written notice of the Borrowing
Base Deficiency, prepay Advances in an aggregate principal amount sufficient to
eliminate such Borrowing Base Deficiency in cash or, in the sole and absolute
discretion of Administrative Agent, utilizing an Advance under Tranche B; 

          (ii)     
prepay Advances in three (3) monthly installments each equal to one-third of
such Borrowing Base Deficiency (after taking into account any properties pledged
to the Administrative Agent, for the ratable benefit of Lenders pursuant to
subclause (iii) below), with the first such installment due thirty (30)
days after the date such Borrowing Base Deficiency notice is received by the
Borrower and each of the 

32 




other two installments due thirty (30)
days and sixty (60) days, respectively, after payment of the first installment;


          (iii)      grant
to the Administrative Agent for the ratable benefit of Lenders a first priority
Lien in additional collateral which, in the Administrative Agent’s sole
determination, have sufficient loan value to eliminate such Borrowing Base
Deficiency, or 

          (iv)     
eliminate the Borrowing Base Deficiency through a combination of the actions
described in subclauses (i), (ii) and (iii) above. 

          (v)      Insurance
Proceeds. Borrower will promptly pay to the Administrative Agent, for the
ratable benefit of each of the Lenders, any cash amounts received as insurance
proceeds under any property or casualty insurance in relation to any portion of
the Collateral to the extent not used, with prior written consent of the
Administrative Agent (not be unreasonably withheld or delayed), to repair or
replace such assets. All amounts paid by Borrower to the Administrative Agent
under this Section 2.13(b)(v) will be immediately applied as a prepayment
of the Loans in accordance with Section 2.9(d). 

                         (c)      Proceeds
from Sale Pursuant to Exercise of Preferential Purchase Right. If the holder
of any preferential purchase right related to the Properties timely exercises
such preferential purchase right, Borrower shall promptly pay to Administrative
Agent one hundred percent (100%) of all proceeds received by Borrower from the
sale of the Properties covered by such preferential purchase right. All amounts
paid by Borrower to the Administrative Agent under this Section 2.13(c) will be
immediately applied as a prepayment of the Loans in accordance with Section
2.9(d). 

          Section
2.14      Revenues Remaining in the Borrower
Sub-Account. Upon the discharge by Borrower of all Obligations owed by
Borrower to the Administrative Agent and each of the Lenders (other than
indemnity and similar obligations that survive the termination of this
Agreement), the Administrative Agent will pay promptly to Borrower all funds
remaining, if any, in the Borrower Sub-Account. 

          Section
2.15      Taxes.

                         (a)      Taxes
Not Deducted from Payments to Lender. All payments made by Borrower under this
Agreement will be made free and clear of and without deduction for any and all
present or future taxes, levies, imposts, deductions, charges or withholdings,
and all similar liabilities (collectively, “Taxes”); provided that, as
used in this Section 2.15, the defined term “Taxes” shall exclude,
in the case of any Lender, taxes, levies, imposts, deductions, charges or
withholdings and all similar liabilities imposed on its income, and franchise or
similar taxes imposed on it, by any jurisdiction (or political subdivision
thereof) where such Lender or the Administrative Agent is organized, conducts
business or maintains its lending office and taxes, levies, imposts, deductions,
charges or withholdings and all similar liabilities that would not have been
imposed but for a connection (other than a connection arising solely as a result
of the transactions contemplated by this Agreement) between such Lender and the
jurisdiction 

33 




imposing such tax, levy, impost, deduction, charge, withholding
or similar liability. If Borrower is required by law to deduct any Taxes from
any sum payable to any Lender, (i) the sum payable will be increased by an
amount so that, after making all required deductions (including deductions
applicable to additional sums payable under this Section 2.15(a)) such
Lender will receive an amount equal to the sum it would have received had no
deductions been made, (ii) Borrower will deduct from the sum payable to such
Lender an amount sufficient to pay the Taxes and pay the balance to such Lender,
and (iii) Borrower will promptly pay the full amount deducted to the relevant
Taxing Authority or other Governmental Authority in accordance with applicable
law. 

                         (b)     
Other Taxes. In addition, and to the fullest extent permitted by
applicable law, Borrower agrees to pay any present or future stamp, documentary,
mortgage registration or similar taxes or any other excise or property taxes,
charges or similar levies that arise from any payment made or from the
execution, delivery or registration of, or otherwise with respect to, this
Agreement, or any other Loan Documents, (collectively, the “Other
Taxes”). 

                         (c)     
INDEMNIFICATION. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW,
EXCEPT AS PROVIDED IN CLAUSE (e) BELOW AND PROVIDED THAT THERE IS NO
DEFAULT OF SUCH ADMINISTRATIVE AGENT’S OR LENDER’S REPRESENTATIONS CONTAINED IN
THIS AGREEMENT, BORROWER WILL INDEMNIFY ADMINISTRATIVE AGENT AND LENDERS FOR THE
FULL AMOUNT OF TAXES AND OTHER TAXES (INCLUDING, BUT NOT LIMITED TO, ANY TAXES
OR OTHER TAXES IMPOSED BY ANY GOVERNMENTAL AUTHORITY ON AMOUNTS PAYABLE UNDER
THIS SECTION 2.15(C) AND PAID BY ADMINISTRATIVE AGENT OR ANY LENDERS)
PAID BY ADMINISTRATIVE AGENT OR ANY LENDERS (ON BEHALF OF BORROWER), AND ANY
LIABILITY (INCLUDING PENALTIES, INTEREST AND REASONABLE EXPENSES) ARISING FROM
OR WITH RESPECT TO THOSE AMOUNTS, WHETHER OR NOT THE TAXES OR OTHER TAXES WERE
CORRECTLY OR LEGALLY ASSERTED. ANY PAYMENT PURSUANT TO THE INDEMNIFICATION
DESCRIBED IN THIS SECTION 2.15(C) WILL BE MADE BY BORROWER WITHIN THIRTY
(30) DAYS AFTER THE DATE ADMINISTRATIVE AGENT OR LENDERS MAKE WRITTEN DEMAND FOR
THOSE PAYMENTS. SUCH DEMAND BY THE ADMINISTRATIVE AGENT OR LENDERS WILL STATE
WITH SPECIFICITY THE BASIS FOR THE TAX, IDENTIFY THE TAXING AUTHORITY ASSERTING
THE TAX AND CERTIFY THAT ADMINISTRATIVE AGENT OR LENDERS HAVE PAID THE TAX. 

                         (d)      Certification
of Tax Status By Lender. Each Lender agrees that it will, not more than ten
(10) Business Days after the date of this Agreement, or, in the case of a Person
that becomes a Lender pursuant to Section 13.2, prior to the date such
Person becomes a Lender (i) execute and deliver to Borrower a duly
completed copy of United States Internal Revenue Service Form W 8BEN, W-81MY or
W-8ECI (as applicable), certifying in either case that such Lender is entitled
to receive payments under this Agreement without deduction or withholding of any
United States federal income taxes, and (ii) deliver to Borrower a United
States Internal Revenue Service Form W-8 or W-9, as the case may be, and certify
that it is entitled to an exemption from United States backup withholding tax.
Each Lender further agrees to deliver to Borrower (x) renewals or additional
copies of such forms (or any successor forms) on or before the date that such
forms expires or become obsolete, and (y) after the occurrence of any event 

34 




requiring a change in the most recent forms so delivered by it,
such additional forms or amendments thereto as may be reasonably requested by
Borrower. All forms or amendments described in the preceding sentence shall
certify that such Lender is entitled to receive payments under this Agreement
without deduction or withholding of any United States federal income taxes,
unless an event (including without limitation any change in treaty, law or
regulation) has occurred prior to the date on which any such delivery would
otherwise be required which renders all such forms inapplicable or which would
prevent such Lender from duly completing and delivering any such form or
amendment with respect to it and such Lender advises Borrower, in writing, that
it is not capable of receiving payments without any deduction or withholding of
United States federal income tax. 

                         (e)     
Certain Events Not Entitled to Indemnification. For any period during
which a Lender has failed to provide Borrower with an appropriate form pursuant
to clause (d), above (unless such failure is due to a change in treaty,
law or regulation, or any change in the interpretation or administration thereof
by any Governmental Authority, occurring subsequent to the date on which a form
originally was required to be provided), such Lender shall not be entitled to
indemnification under this Section 2.15 with respect to Taxes imposed by
the United States; provided that, if such Lender becomes subject to Taxes
because of its failure to deliver a form required under clause (d) above,
Borrower shall take such steps as such Lender shall reasonably request to assist
such Lender in recovering such Taxes. 

                         (f)     
Documentation of Exemptions. To the extent a Lender is entitled to an
exemption from or reduction of withholding tax with respect to payments under
this Agreement or any Promissory Note pursuant to the law of any relevant
jurisdiction or any treaty, such Lender shall deliver to Borrower, at the time
or times prescribed by applicable law, such properly completed and executed
documentation prescribed by applicable law as will permit such payments to be
made without withholding or at a reduced rate of withholding. 

                         (g)     
INDEMNIFICATION BY LENDER FOR CERTAIN TAX CLAIMS. IF THE U.S. INTERNAL
REVENUE SERVICE OR ANY OTHER GOVERNMENTAL AUTHORITY ASSERTS A CLAIM THAT
BORROWER DID NOT PROPERLY WITHHOLD TAX FROM AMOUNTS PAID TO OR FOR THE ACCOUNT
OF ANY LENDER (BECAUSE THE APPROPRIATE FORM WAS NOT DELIVERED OR PROPERLY
COMPLETED, BECAUSE SUCH LENDER FAILED TO NOTIFY BORROWER OF A CHANGE IN
CIRCUMSTANCES WHICH RENDERED ITS EXEMPTION FROM WITHHOLDING INEFFECTIVE, OR FOR
ANY OTHER REASON), SUCH LENDER (BUT NEITHER THE ADMINISTRATIVE AGENT NOR ANY
OTHER LENDER) SHALL INDEMNIFY BORROWER FULLY FOR ALL AMOUNTS PAID, DIRECTLY OR
INDIRECTLY, BY BORROWER AS TAX, WITHHOLDING THEREFOR, OR OTHERWISE, INCLUDING
PENALTIES AND INTEREST, AND INCLUDING TAXES IMPOSED BY ANY JURISDICTION ON
AMOUNTS PAYABLE TO BORROWER UNDER THIS SUBSECTION, TOGETHER WITH ALL COSTS AND
EXPENSES RELATED THERETO (INCLUDING ATTORNEYS’ FEES). THE OBLIGATIONS OF ANY
INDEMNIFYING LENDER UNDER THIS SECTION 2.15(G) SHALL SURVIVE THE PAYMENT
OF THE OBLIGATIONS AND TERMINATION OF THIS AGREEMENT. 

35 




                         (h)     
Designation of Substitute Lending Office. Each Lender agrees that, upon
the occurrence of any event giving rise to the operation of this section, it
will, if requested by Borrower, use reasonable efforts (subject to overall
policy considerations of such Lender) to designate another applicable lending
office, provided that such designation is made on such terms that such Lender
and its applicable lending office suffer no economic, legal or regulatory
disadvantage, with the object of avoiding the consequence of the event giving
rise to the operation of this section. Nothing in this Section 2.15(h)
shall affect or postpone any of the obligations of Borrower or the rights of any
Lender provided in this section. 

                         (i)      Effect
of Tax Refund. Each Lender shall use its reasonable efforts to obtain in a
timely fashion any refund, deduction or credit of any Taxes or Other Taxes paid
or reimbursed by the Borrower pursuant to this Section 2.15. If a Lender
receives a benefit in the nature of a refund, deduction or credit (including a
refund in the form of a deduction from or credit against taxes that are
otherwise payable by such Lender) of any Taxes or Other Taxes with respect to
which Borrower has made a payment under this Section 2.15, such Lender
will notify Borrower and agrees to reimburse Borrower to the extent of the
benefit of such refund, deduction or credit, including any interest paid by the
relevant Governmental Authority, promptly after such Lender reasonably
determines that such refund, deduction or credit has become final; provided that
nothing contained in this Section 2.15(i) shall require any Lender to
make available its tax returns (or any other information relating to its taxes
which it deems to be confidential) or to attempt to obtain any such refund,
deduction or credit (including any interest paid by the relevant Governmental
Authority and received by such Lender), which attempt would be inconsistent with
any reporting position otherwise taken by any Lender on its applicable tax
returns. 

ARTICLE III 

  SECURITY

          Section
3.1      Grant of Security Interests.

                         (a)     
Mortgage and Security Interest. As collateral security for all of the
Obligations to the Administrative Agent and each of the Lenders under this
Agreement and the other Loan Documents, Borrower shall and hereby grants,
assigns, transfers and conveys to the Administrative Agent, for the ratable
benefit of each of the Lenders, a first priority mortgage Lien on and first
priority and perfected security interest in the Collateral subject only to the
Permitted Encumbrances. 

                         (b)     
Notice of Assignment of Proceeds. All of Borrower’s account debtors
(including any Operators and Purchasers) relating to Borrower’s Working Interest
or Net Revenue Interest in the Properties will receive notification from the
Administrative Agent (as assignee) and Borrower, substantially in the form of
Exhibit H, that all proceeds from sales of all production or transmission
of Hydrocarbons from or allocable to Borrower’s Net Revenue Interest in the
Properties have been assigned to the Administrative Agent and are to be paid
into the Project Account. Borrower shall use commercially reasonable efforts to
cause all Purchasers to execute the assignment notifications to confirm their
agreement to remit all proceeds from sales of all production from or allocable
to Borrower’s Net Revenue Interest in the Properties into the Project Account.
Subject to applicable contractual obligations and restrictions, the 

36 




Administrative Agent will have the right to prohibit Borrower
from selling any Hydrocarbons from or allocable to the Properties to any
Purchaser who refuses to timely acknowledge and abide by the payment
instructions set forth in any notice under this Section 3.1(b). 

                         (c)      Further
Assurances. Borrower will, upon request, execute and deliver to
Administrative Agent for the benefit of Lenders, any and all documents
necessary, in the reasonable opinion of the Administrative Agent, to create,
perfect, maintain and preserve the priority of the Administrative Agent’s Liens
on the Collateral subject only to the Permitted Encumbrances. Administrative
Agent, at Borrower’s expense, will cause searches of the Uniform Commercial Code
filing records or similar public records to be conducted from time to time in
order to evidence, perfect, maintain or continue perfection, or confirm the lien
priority of the Administrative Agent in and to the Collateral granted by
Borrower, perfect those security interests in after acquired property, continue
the perfection of all security interests granted by Borrower and file financing
statements against Borrower relating to the security interests securing any
Obligations. Borrower irrevocably authorize the Administrative Agent to prepare
and file, at any time and from time-to-time, in any filing office, initial
financings statements, and amendments to them, necessary or convenient to the
perfection or continuation of the security interests granted by Borrower. 

                         (d)      Release
of Financing Statements. Upon the indefeasible payment in cash and
performance in full of all Obligations (including, without limitation, any
Obligation relating to the Swap Agreement) under this Agreement (other than
indemnity obligations and similar obligations that survive the termination of
this Agreement), the Administrative Agent will deliver to Borrower, at
Borrower’s expense, releases of all financing statements and all other Security
Documents with an acknowledgment that the same have been terminated, and
Borrower shall deliver to the Administrative Agent a general release of all of
liabilities and obligations of the Administrative Agent and each of the Lenders
under this Agreement and the other Loan Documents. The obligations of Borrower
under the Net Profits Overriding Royalty Interest Conveyance will survive the
termination of this Agreement and the release of the security interests. 

          Section
3.2      Equipment.

                         (a)      Preservation
of Equipment. All Equipment currently owned or hereafter acquired by
or on behalf of Borrower will be kept at the applicable Property or other places
of business of Borrower except as permitted by this Agreement or the applicable
Mortgage or except with the prior written consent of Administrative Agent;
provided, however, Borrower or the Operators may dispose of
Equipment in accordance with the terms of any applicable Operating Agreement and
may dispose of obsolete, broken or worn Equipment without the Administrative
Agent’s consent but, for any Equipment with a salvage value in excess of
Twenty-five Thousand Dollars ($25,000.00), upon prompt notification to
Administrative Agent. Borrower shall use reasonable commercial efforts to cause
each Operator at all times to (i) keep correct and accurate records itemizing
and describing the location, kind, type, age, condition and cost of and
accumulated depreciation on all Equipment relating to the subject Operating
Agreement and (ii) make those records available during the Operator’s usual
business hours upon prior written notice to any of the officers, employees or
agents of Borrower and Lender. 

37 




                         (b)      Sale
or Disposal of Equipment. Where Borrower is permitted to dispose of
any Equipment, it shall do so, or shall cause the Operators to do so, at arm’s
length, in good faith and by obtaining the maximum amount of recovery
practicable and without impairing the operating integrity of the remaining
Equipment. 

          Section
3.3      Subordination Agreements. Borrower
shall cause the Affiliates of Borrower, and Borrower shall use commercially
reasonable efforts to cause any other Person designated by the Administrative
Agent to, execute a Subordination Agreement in favor of the Administrative
Agent, for the benefit of each of the Lenders, subordinating to the Obligations
any existing or future Debt owed by Borrower to such Person and subordinating
any Lien in favor of such Person to the Liens in favor of the Administrative
Agent. 

ARTICLE IV 

  REPRESENTATIONS AND WARRANTIES

          In
order to induce each Lender to make the Loan, Borrower makes the following
representations and warranties to each Lender as of the Closing Date, each and
all of which will survive the execution and delivery of this Agreement and
continue until all Obligations (other than indemnity obligations and similar
obligations that survive the termination of this Agreement) have been satisfied
and no Lender has any further commitment to make any Advance under this
Agreement. 

          Section
4.1      Formation and Existence. Borrower is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Nevada. Borrower is qualified to do business in every other
jurisdiction where the nature of its business or the ownership of its property
requires it to be so qualified and where failure to so qualify could reasonably
be expected to have a Material Adverse Effect. 

          Section
4.2      Name; Executive Offices. The name
of Borrower is as listed in its Charter Documents on file in the public records
of its jurisdiction of organization and is “Doral Energy Corp.”.
Borrower’s principal place of business and chief executive offices are located
at the address specified in Section 13.3 (or as set forth in a notice
delivered pursuant to Section 13.3). 

          Section
4.3      Capitalization; Ownership;
Subsidiaries. The outstanding Equity Interests of Borrower are as set forth
on Schedule 4.3 as of July 29, 2008. Except for the Equity Interests
described in the preceding sentence, there are no other classes, types or
designations of Equity Interests in Borrower. No other Person owns any interest
in Borrower or is the holder of any right that could result in the transfer or
issuance of any interest in Borrower. Borrower does not have any Subsidiaries
other than those disclosed on Schedule 4.3. 

          Section
4.4      Authorization; Non-Contravention. The
execution, delivery and performance of Borrower’s obligations under the Loan
Documents and the creation of all Liens provided for in those agreements: 

                         (a)     
are within the corporate power and authority of Borrower; 

                         (b)      have
been duly authorized by all necessary corporate action of Borrower; 

38 




                         (c)     
are not in contravention of (i) any agreement or indenture to which Borrower is
a party or by which it or its property is bound in any respect that would
reasonably be expected to have a Material Adverse Effect, (ii) the Charter
Documents of Borrower, or (iii) to Borrower’s knowledge any provision of law
applicable to such Borrower in any respect that would reasonably be expected to
have a Material Adverse Effect; 

                         (d)     
do not require the consent or approval of any Governmental Authority, or any
other Person which has not been obtained (or is not routinely granted and
expected to be obtained in the ordinary course) and is described on Schedule
4.4(d)) and a correct and complete copy of each of those approvals has been
furnished to Administrative Agent; and 

                         (e)     
are legal, valid and binding obligations of Borrower, enforceable against such
Borrower in accordance with their respective terms, except as enforceability may
be limited by applicable Debtor Relief Laws and by general equitable principles.


          Section
4.5      Solvency. Borrower is Solvent and will
continue to be Solvent after giving effect to the transactions contemplated by
this Agreement. 

          Section
4.6      Omissions and Misstatements. Borrower
has disclosed to the Administrative Agent and the Lenders all agreements,
instruments and corporate or other restrictions to which they are subject, and
all other matters known to them, that, individually or in the aggregate, could
reasonably be expected to result in a Material Adverse Effect. The other
reports, financial statements, certificates or other information furnished in
writing by or on behalf of Borrower to the Administrative Agent or any Lender or
any of its Affiliates in connection with the negotiation of this Agreement or
any other Loan Document or delivered hereunder or under any other Loan Document
(as modified or supplemented by other information so furnished) taken as a
whole, do not contain any material misstatement of fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided that, with
respect to projected financial information, Borrower represents only that such
information was prepared in good faith based upon assumptions believed to be
reasonable at the time. To Borrower’s knowledge, after due inquiry, there is no
fact peculiar to Borrower which could reasonably be expected to have a Material
Adverse Effect or in the future is reasonably likely to have a Material Adverse
Effect and which has not been set forth in this Agreement or the Loan Documents
or the other documents, certificates and written statements furnished to the
Administrative Agent or the Lenders by or on behalf of Borrower prior to, or on,
the date hereof in connection with the transactions contemplated hereby. To
Borrower’s knowledge, after due inquiry, there are no statements or conclusions
in any Reserve Report covering the Properties and delivered by Borrower to
Administrative Agent which are based upon or include misleading information or
fail to take into account material information regarding the matters reported
therein. 

          Section
4.7      Joint Venture. Borrower is not engaged
in any joint venture or partnership with any other Person. 

          Section
4.8      Commissions; Expenses. Except for the
commissions for which Borrower is solely responsible (as set forth on
Schedule 4.8), no broker’s or finder’s fees or commissions 

39 




have been paid or will be payable by Borrower or any of its
Affiliates to any Person in connection with the transactions contemplated by
this Agreement. BORROWER WILL INDEMNIFY ADMINISTRATIVE AGENT, LENDERS, AND THEIR
RESPECTIVE AFFILIATES AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES AND
AGENTS FROM AND AGAINST, AND HOLD EACH OF THOSE PARTIES HARMLESS ON DEMAND FROM,
ALL LIABILITIES, COSTS, DAMAGES AND EXPENSES, INCLUDING ATTORNEYS’ FEES AND
DISBURSEMENTS RELATING TO ANY THIRD PARTIES CONCERNING FINDER’S, BROKERAGE,
FINANCING OR SIMILAR FEES ARISING IN CONNECTION WITH THE TRANSACTIONS
CONTEMPLATED UNDER THIS AGREEMENT. 

          Section
4.9      Tax Returns. Borrower has filed
all material tax returns (foreign, federal, state and local) required to be
filed (after giving effect to any applicable extensions) and have either paid
all taxes due (including interest and penalties) or are contesting such taxes in
good faith in appropriate proceedings and has adequate reserves for such
contested taxes. No assessments have been made against Borrower by any Taxing
Authority and not paid by same (except for assessments that such entity timely
protested in good faith and through appropriate proceedings and against which
Borrower has made and maintain adequate reserves) nor has any penalty or
deficiency been assessed by any Taxing Authority. To Borrower’s knowledge and
except in connection with such examinations that have been previously disclosed
to the Administrative Agent by Borrower in writing and with respect to which
Borrower has timely protested in good faith through appropriate proceedings and
against which Borrower has made and maintain adequate reserves, no material
federal or other income tax returns of Borrower is presently being examined by
the Internal Revenue Service or any other Taxing Authority nor are the results
of any prior examination by the Internal Revenue Service or any Taxing Authority
being contested by Borrower. Other than in respect of taxes being contested as
permitted under Section 6.29 below, no material tax Liens have been filed
against Borrower. 

          Section
4.10      Litigation; Governmental Proceedings.
Except as set forth on Schedule 4.10, no claim, action, suit or other
proceeding is pending or, to Borrower’s knowledge, has been threatened against
Borrower or Borrower’s predecessor in interest to the Properties with respect to
the Properties or the transactions contemplated by this Agreement, at law, in
equity or otherwise, before or involving any Governmental Authority, or before
any arbitrator or panel of arbitrators, and Borrower has not accepted liability
for any action or proceeding, in each case the effect of which could reasonably
be expected to have a Material Adverse Effect. There is no proceeding pending
before any Governmental Authority and, to Borrower’s knowledge, no investigation
has been commenced before any Governmental Authority the effect of which could
reasonably be expected to have a Material Adverse Effect. 

          Section
4.11      Ownership of Collateral;
Interests. 

                         (a)      All
Collateral is owned of record by Borrower free and clear of any Lien other than
the Permitted Encumbrances. Except for the Permitted Encumbrances, Borrower has
Defensible Title to the Properties, including each Lease related to the
Properties. Except for Permitted Encumbrances or as otherwise consented to in
writing by Administrative Agent, Borrower’s interest in the Properties is not
subject to any mineral reservations or top leases of record. Except for
Permitted Encumbrances and the Liens arising under the Security 

40 




Documents, to Borrower’s knowledge, there are no unrecorded
documents or agreements which may result in the impairment or loss of Borrower’s
ability to mortgage the Properties or of the Administrative Agent’s ability to
enforce the Mortgage and convey the Properties. Subject to the Permitted
Encumbrances, Borrower has all beneficial right, title and interest in and to
the Net Revenue Interest in all production from or allocable to Borrower’s
interest in the Properties (including each Lease) and have the exclusive right
to sell or mortgage the Properties subject to any right in the owners of Royalty
Interests to take their royalty interest in kind. 

                         (b)      To
Borrower’s knowledge, all Leases and material agreements upon which the title
examiner relied to determine Borrower’s interest in the Properties s referenced
in the title opinions and/or reports or other title materials delivered in
connection with the Closing are valid and subsisting, in full force and effect
and there exists no material default or event or circumstance which with the
giving of notice or the passage of time or both would give rise to a material
default under any such lease or leases, which would adversely affect in any
material respect the conduct of the business of Borrower. All of the assets of
Borrower which are reasonably necessary for the operation of their businesses
are in good working condition (ordinary wear and tear excepted) and are
maintained in accordance with prudent business standards. 

                         (c)      Except
for the Properties on Exhibit A, Borrower owns no other interest of any
kind, including but not limited to direct or indirect ownership, Equity
Interests, or Equity Equivalents, in Hydrocarbons. Borrower has no right to
acquire any such interest or ownership. Borrower has no call upon, option to
purchase or similar rights under any agreement with respect to an interest in
Hydrocarbons. Except for the agreements listed on Schedule 4.11(c), there
is no agreement in force and effect (including, without limitation, letters of
intent), whether written or oral, between Borrower or any of its Affiliates and
any other Person regarding the acquisition or financing of any interest in
Hydrocarbons. 

          Section
4.12      Debt. Except as set forth on
Schedule 4.12 hereof, upon consummation of the transactions contemplated
by this Agreement, Borrower will have no Debt outstanding other than the
Obligations. 

          Section
4.13      Intellectual Property. Borrower
possesses or will possess all trademarks, trade names, trade styles, copyrights
and patents necessary to conduct its business as it is presently conducted or as
Borrower intends to conduct it in the future without any infringement or
conflict with the rights of any other Person with respect to trademarks, trade
names, trade styles, copyrights or patents, which failure could reasonably be
expected to have a Material Adverse Effect. 

          Section
4.14      Other Leases. Borrower is not the
lessor or lessee under any material leases (including real property leases,
equipment leases, capital leases, etc.), other than Leases included in the
Properties. 

          Section
4.15      Investments. Borrower: 

                         (a)      has
not committed to make any Investment; 

41 




                         (b)     
is not a party to any indenture, agreement, contract, instrument or lease or
subject to any charter, by-law or other restriction or any injunction, order,
restriction or decree, which could reasonably, materially and adversely affect
its business, operations, Properties or assets; 

                         (c)     
is not a party to any “take or pay” contract or settlement or any other contract
or agreement which (i) allows its Natural Gas purchaser to take Natural Gas
previously paid for out of future Natural Gas production or (ii) provides for a
cash rebate to the Natural Gas purchaser if reimbursement of take or pay monies
is not made through Natural Gas production; 

                         (d)      to
its knowledge, after due inquiry, has not produced Hydrocarbons from the
Properties in excess of the percentage to which its ownership interest in the
applicable Property would entitle it, pursuant to balancing rights of third
parties or pursuant to balancing duties under Governmental Requirements; or 

                         (e)      has
no contingent or long term liability or commitment that has had a Material
Adverse Effect. 

          Section
4.16 Environmental Matters. Except as disclosed on Schedule 4.16,
to Borrower’s knowledge: 

                         (a)      Neither
any Property of Borrower nor any of such Borrower’s Affiliates or the operations
conducted thereon violate any order or requirement of any Governmental Authority
or any Environmental Laws; 

                         (b)      Without
limitation of clause (a) above, no Property of Borrower or any of its
Affiliates nor the operations currently conducted thereon or by any prior owner
or operator of such Property or operation, are in violation of or subject to any
existing, pending or threatened action, suit, investigation, inquiry or
proceeding by or before any Governmental Authority or to any remedial
obligations under Environmental Laws; 

                         (c)      All
notices, permits, licenses or similar authorizations, if any, required to be
obtained or filed in connection with the operation or use of any and all
Property of Borrower and each of its Affiliates, including without limitation
past or present treatment, storage, disposal or release Hazardous Materials or
solid waste into the environment, have been duly obtained or filed, and Borrower
and each such Affiliate are in compliance with the terms and conditions of all
such notices, permits, licenses and similar authorizations; 

                         (d)      All
Hazardous Materials, solid waste, and oil and gas exploration and production
wastes, if any, generated at any and all Property of Borrower or any of its
Affiliates has in the past been transported or treated or disposed of in
accordance with Environmental Laws, and all such transport carriers and
treatment and disposal facilities have been and are operating in compliance with
Environmental Laws, and are not the subject of any existing, pending or
threatened action, investigation or inquiry by any Governmental Authority in
connection with any Environmental Laws; 

                         (e)     
No Hazardous Materials, solid waste, or Crude Oil and Natural Gas exploration
and production wastes, have been disposed of or otherwise released and there has


42 




been no threatened release of any Hazardous Materials on or to
any Property of Borrower or any of its Affiliates except in compliance with
Environmental Laws; 

                         (f)      To
the extent applicable, all Property of Borrower and each of its Affiliates
currently satisfies, in all material respects, all design, operation, and
equipment requirements imposed by the OPA (as defined in the definition of
Environmental Laws), and Borrower does not have any reason to believe that such
Property, to the extent subject to OPA, will not be able to maintain compliance
with the OPA requirements during the term of this Agreement; and 

                         (g)      Neither
Borrower nor any of Borrower’s Affiliates have any known contingent liability in
connection with any release or threatened release of any Crude Oil, Hazardous
Material or solid waste into the environment. 

          Section
4.17      Operating Permits and Licenses.
Borrower has fulfilled all requirements for obtaining and has obtained and
maintained all licenses, permits, operating authorities and other authorizations
necessary for the conduct of the business of Borrower or for Borrower or
Operators to operate or maintain each of the Properties which the failure to
obtain and maintain could reasonably be expected to have a Material Adverse
Effect, and Borrower or Operators is and will be fully qualified to own and hold
such Properties and to exercise in all material respects the rights under all
leases, contracts or other documents governing the operation or maintenance of
the Properties. There are no material pending fees, assessments or penalties
relating to such permits, licenses and operating authorities other than those
payable in the ordinary course of business and not yet delinquent and listed on
Schedule 4.17 (including such updates to Schedule 4.17 that are
prepared by Borrower and approved by the Administrative Agent in writing (such
approval not to be unreasonably withheld or delayed) from time to time). The
continuation, validity and effectiveness of each such license, permit and other
authorization are not and will in no way be adversely affected by the
transactions contemplated by this Agreement or the Security Documents. Borrower
is not in breach of, or in default under the terms of, and has not engaged in
any activity which would cause revocation or suspension of, any such licenses,
permits or authorizations which could reasonably be expected to have a Material
Adverse Effect and no action or proceeding looking to or contemplating the
revocation or suspension of any of them is pending or, to the best of Borrower’s
knowledge, threatened against Borrower or Operators. Borrower is not in
violation of any Governmental Requirement relating to any of the Properties or
otherwise applicable to Borrower which could reasonably be expected to have a
Material Adverse Effect. No suspension of production on the Properties is in
effect. 

          Section
4.18      Maintenance of Properties. Except for
such acts or failures to act as could not be reasonably expected to have a
Material Adverse Effect, to the best of Borrower’s knowledge, the Properties
(together with any other properties unitized with any of the Properties) have
been maintained, operated and developed in a good and workmanlike manner and in
conformity with all Governmental Requirements and in conformity with the
provisions of all leases, subleases or other contracts comprising a part of the
Properties and other contracts and agreements forming a part of the Properties.
Except to the extent it could not reasonably be expected to have a Material
Adverse Effect, to the extent applicable, and to Borrower’s knowledge, (a) no
Property is subject to having allowable production reduced below the full and


43 




regular allowable (including the maximum permissible tolerance)
because of any overproduction (whether or not the same was permissible at the
time); (b) none of the wellbores of the Wells comprising a part of the
Properties (or properties unitized with any of the Properties) deviates more
than the maximum permitted by Governmental Requirements, and such Wells are, in
fact, bottomed under and are producing from, and the well bores are wholly
within, the Properties (or in the case of Wells located on properties unitized
with any of the Properties, such unitized properties); and (c) Borrower, and to
Borrower’s knowledge, any other Operator are not in violation of, or in default
under, any material agreement affecting any Lease or any other contract or
agreement to which either Borrower and/or any other Operator is a party or is
bound or its property is bound, except to the extent that such violation or
default could not reasonably be expected to have a Material Adverse Effect. 

          Section
4.19      USA PATRIOT Act Representation.
Neither Borrower nor any of its Affiliates is a country, individual or entity
named on the Specifically Designated National and Blocked Persons list issued by
the Office of Foreign Asset Control of the Department of the Treasury of the
United States of America. 

          Section
4.20      Contingent Liabilities. Except
for obligations arising under surety bonds required by Governmental Authorities
and which are detailed in Schedule 4.20, indemnity, cleanup and other
obligations of a customary nature assumed or incurred (excluding Debt for
borrowed money) in favor of any seller of the Leases or related property, and
Debt permitted by Section 7.1, Borrower has not assumed, guaranteed,
endorsed or otherwise become directly, indirectly or contingently liable in
connection with any liability of any other Person, except for the endorsement of
checks and other negotiable instruments for collection in the ordinary course of
business, or as may be required under the Operating Agreements or the Security
Documents or other documents executed in connection with the Security Documents.


          Section
4.21      Restrictions on Equipment. Except
for the Permitted Encumbrances, there is no restriction or other limitation on
the Administrative Agent’s right to obtain or exercise its security interests in
the Equipment, including the right to foreclose on and sell the Equipment or to
exercise all other rights and remedies of a secured party under the laws of each
jurisdiction applicable to the Collateral but subject to Debtor Relief Laws,
laws related to the rights of co-owners of property and laws related to the
enforcement of security interests on personal property. 

          Section
4.22      Unpaid Bills. Except as set forth
on Schedule 4.22, Borrower has no past due bills for improvements to the
Collateral that could give rise to mechanics’, materialmen’s or other similar
Liens arising by operation of applicable law that could rank in priority ahead
of any of the Liens arising under the Security Documents, except for such bills
(a) that have (to the extent such bill arose after Closing) been disclosed to
the Administrative Agent in writing, (b) that are being diligently contested in
good faith and (c) for which Borrower has made and maintain adequate reserves.
Schedule 4.22 also lists any vendors that have provided goods or services
to the Borrower for the Properties for the six (6) months prior to the date of
this Agreement. 

          Section
4.23      Taxpayer Identification. Borrower’s
federal taxpayer identification number is 98-0555508. 

44 




          Section
4.24      Investment Company. Borrower is
not an “investment company” within the meaning of the Investment Company
Act of 2005, as amended. 

          Section
4.25      Borrower a Public Company. Borrower’s
Equity Interests are registered under federal securities laws. Borrower is in
material compliance with all Governmental Requirements in connection with the
registration of its Equity Interests. 

          Section
4.26      Other Agreements. Except as set forth
on Schedule 4.26, there is no agreement in force and effect (including,
without limitation, letters of intent), whether written or oral, between
Borrower or any of its Affiliates and any other Person regarding the acquisition
or financing of any of the Properties or the purchase and sale of production
from or allocable to the Properties other than pursuant to Hydrocarbon purchase
and sale agreements disclosed to and approved in writing by the Administrative
Agent. Except for rights set forth in the Permitted Encumbrances, no Person has
any call upon, option to purchase or similar rights under any agreement with
respect to Borrower’s Working Interest or Net Revenue Interest in the Properties
or to Borrower’s production from the Properties other than pursuant to
Hydrocarbon purchase and sale agreements satisfactory to the Administrative
Agent and Persons who have waived such rights in writing with respect to the
Properties. 

          Section
4.27      Basic Documents. With respect to
the Basic Documents: 

                         (a)      all
are in full force and effect in accordance with their terms and in all material
respects constitute valid and binding obligations, except as limited by
applicable Debtor Relief Laws and by general equitable principles; 

                         (b)     
no other party to any Basic Document (or any successor in interest to that
party) is in breach or default with respect to any of its obligations under the
Basic Documents which could reasonably be expected to have a Material Adverse
Effect; 

                         (c)     
no party to any Basic Document has given or has threatened to give notice of any
action to terminate, cancel, rescind or procure a judicial reformation of any
Basic Document or any of their provisions the termination, cancellation,
rescission or reformation of which could reasonably be expected to have a
Material Adverse Effect; and 

                         (d)     
the execution and delivery of this Agreement and the consummation of the
transactions contemplated by this Agreement will not result in a breach of, a
default under, or other violation of the provisions of any Basic Document. 

          Section
4.28      Farmout Agreements and Subject Contracts,
Etc. With respect to the Properties and the unit agreements, pooling
agreements, communization agreements and other Basic Documents creating the
interests constituting the Properties, and except as expressly set forth on
Exhibit A and as set forth in any title opinions and/or reports or other
title materials provided by Borrower to the Administrative Agent upon which the
Administrative Agent and each of the Lenders are expressly entitled to rely, to
Borrower’s knowledge after due inquiry: 

                         (a)      there
are no outstanding farmout agreements, obligations to drill additional Wells or
agreements to engage in other development operations, except for obligations
arising under offset Well provisions, obligations arising under provisions of
any Operating Agreement 

45 




which allow the parties to elect whether or not they will
participate in development activities other than as specified in those leases,
contracts and other agreements; 

                         (b)      there
are no limitations as to the depths covered or substances to which such
interests purport to apply other than as specified in those leases, contracts
and other agreements; and 

                         (c)     
there are no royalty provisions (other than those allowing a lessor or other
royalty owners the right to take in kind) requiring the payment of royalties on
any basis other than as specified in those Leases, contracts and other
agreements. 

          Section
4.29      Operating Agreements. With respect to
the Operating Agreements relating to Borrower’s Working Interest and Net Revenue
Interest in the Properties: 

                         (a)      Schedule
4.29 lists all Operating Agreements to which the Properties are subject and
the Operator for each of the Properties which Operators are hereby approved by
the Administrative Agent; 

                         (b)      there
are no outstanding calls for payments against Borrower under any AFE or payments
which are past due or which Borrower or, to Borrower’s knowledge, any
predecessor of Borrower has committed to make which have not been or are not
being paid within the terms required; and 

                         (c)     
there are no operations under any of the Operating Agreements with respect to
which Borrower has become a non consenting party nor are there any non
consenting penalties binding or that will become binding upon Borrower that are
not reflected in the Net Revenue Interest or Working Interest as set forth on
Exhibit A. 

          Section
4.30      No Unusual Agreements. All
agreements applicable to Borrower’s Working Interest and Net Revenue Interest in
the Properties are of the type generally found in the oil and gas industry and
the gathering and transmission industry, as applicable, and do not (individually
or in the aggregate) contain any unusual provisions which could reasonably be
expected to have a Material Adverse Effect. 

          Section
4.31      Suspense of Proceeds. All proceeds
from the sale of Hydrocarbons from Borrower’s Working Interest or Net Revenue
Interest in the Properties are being received by Borrower in a timely manner and
are not being held in suspense for any reason except to the extent that such
suspense has been disclosed to the Administrative Agent in writing and all such
amounts in suspense, taken together, could not reasonably be expected to have a
Material Adverse Effect. 

          Section
4.32      Employee Plans. Except as provided in
Schedule 4.32, Borrower has no Employee Plans. 

          Section
4.33      Use of Proceeds. Borrower has used and
will use all Advances under the Loan solely for the purposes described in this
Agreement and in a manner consistent with the AFEs and other supporting
documentation provided to the Administrative Agent in connection with each
Advance Request. Borrower is not engaged principally, or as one of its important


46 




activities, in the business of extending credit for the
purpose, whether immediate, incidental or ultimate, of buying or carrying margin
stock (within the meaning of Regulation T, U or X of the Board of Governors of
the Federal Reserve System (the “Board”)). No part of the proceeds of any
Advance will be used for any purpose which violates the provisions of
Regulations T, U or X of the Board. 

          Section
4.34      Borrower’s Interests in the
Properties. Borrower’s Working Interest is not more than, and the Net
Revenue Interest is not less than, the percentages set forth on Exhibit A
for each of the Properties. 

          Section
4.35      Insurance. Prior to the making of the
initial Advance, Borrower will obtain and will maintain for as long as any
Obligations remain owing to any Lender insurance coverage of the types and in
the amounts specified in Section 6.9. Prior to the making of the initial
Advance, one or more policies providing that coverage will be in full force and
effect, and Borrower has not received from any insurer a notice of termination
or non-renewal. Borrower has provided and will continue to timely provide true,
correct and complete copies of all of the insurance policies, certificates and
other documentation to be provided to Administrative Agent under Section
6.9. Such insurance policies are sufficient for the compliance by Borrower
with all Governmental Requirements and all material agreements and such
insurance coverage is in at least amounts and against such risk (including,
without limitation, public liability) that are usually insured against by
companies similarly situated and engaged in the same or a similar business for
the assets and operations of Borrower. Administrative Agent, for the ratable
benefit of Lenders, has been named as an additional insured in respect of such
liability insurance policies and has been named as loss payee with respect to
property loss insurance. 

          Section
4.36      No Material Adverse Effect. No
material adverse change in the business, operations or condition (financial or
otherwise) of Borrower has occurred. 

          Section
4.37      No Other Interest in the
Properties. Neither Borrower, nor to Borrower’s knowledge after due inquiry,
any of its Affiliates (including any Person owning any Equity Interest or any
other security that could be exchanged for or converted into an Equity Interest
in Borrower) owns or is the beneficiary of any direct or indirect interest in
any of the Collateral other than through one of the Borrower. 

          Section
4.38      Conduct of Business Since Formation.
Since its formation, Borrower has conducted no business or operations of any
kind in any jurisdiction other than British Columbia, Nevada, California and New
Mexico. 

          Section
4.39      Restriction on Liens. Borrower is not
party to any agreement or arrangement, or subject to any known order, judgment,
writ or decree, which either restricts or purports to restrict its ability to
grant Liens to Administrative Agent on or in respect of its Properties to secure
the Obligations. 

          Section
4.40      Hedging Agreements. Schedule
4.40 sets forth, as of the date of this Agreement (and after the date of
this Agreement, each report required to be delivered by Borrower pursuant to
Section 5.2 will set forth) a true and complete list of all Hedging
Agreements of Borrower, the material terms thereof (including the type, term,
effective date, 

47 




termination date and notional amounts or volumes), the net mark
to market value thereof, all credit support agreements relating thereto
(including any margin required or supplied) and the counterparty to each such
agreement. 

          Section
4.41      Marketing of Production. Except
for contracts listed on Schedule 4.41 and in effect on the date of this
Agreement, and thereafter either disclosed in writing to the Administrative
Agent (with respect to all of which contracts Borrower represents that it is
receiving a price for all production sold thereunder which is computed
substantially in accordance with the terms of the relevant contract and is not
having deliveries curtailed substantially below the subject Property’s delivery
capacity), no material agreements exist which are not cancelable on sixty (60)
days notice or less without penalty or detriment for the sale of production from
Borrower’s Hydrocarbons (including, without limitation, calls on or other rights
to purchase, production, whether or not the same are currently being exercised)
that (a) pertain to the sale of production at a fixed price and (b) have a
maturity or expiry date of longer than six (6) months from the date hereof. 

          Section
4.42      Deposit Accounts. Except as set
forth on Schedule 4.42, Borrower does not maintain any deposit accounts
(as defined in the UCC). 

          Section
4.43      Labor Matters. Neither Borrower
nor any of its Affiliates are in violation of any Governmental Requirement
dealing with labor matters and all payments due from Borrower or any Affiliate
for employee health and welfare insurance have been paid or accrued as a
liability on its books, other than any such violation or non-payments that could
not reasonably be expected to, individually or in the aggregate, result in a
Material Adverse Effect. 

          Section
4.44      Vendor Liens. There are no other
Liens or inchoate Liens which, with notice, the passage of time or both could be
validly asserted and attached to the Properties related to the provision of
goods or services to Borrower for which payment is outstanding more than sixty
(60) days. 

          Section
4.45      Eligible Contract Participant.
Borrower is an “eligible participant” as that term is defined in the
Commodities Futures Modernization Act of 2000 17 C.F.R. § 35.1(b)(2)(2006), as
amended or supplemented from time-to-time, and the rules and regulations
promulgated thereunder. 

          Section
4.46      Choice of Law. The choice of governing
law of the Loan Documents to which Borrower is a party is a valid choice of law
and should be recognized and enforced by the courts located in the jurisdiction
of incorporation of Borrower. Any judgment obtained in relation to a Loan
Document to which Borrower is a party in the jurisdiction of the governing law
of that Loan Document will be recognized and enforced in the jurisdiction of
incorporation of Borrower. 

          Section
4.47      No Default. No Event of Default, and
on the date of this Agreement and the Closing Date, no Default, is continuing or
is reasonably likely to result from the making of any Advance or the entry into,
the performance of, or any transaction contemplated by, any Loan Document. No
other event or circumstance is outstanding which constitutes (or, with the
expiry of a grace period, the giving of notice, the making of any determination
or any combination of 

48 




any of the foregoing, would constitute) a default or
termination event (however described) under any other agreement or instrument
which is binding on Borrower or any of its Affiliates or to which its (or any of
its Affiliates’) assets are subject which has or is reasonably likely to have a
Material Adverse Effect. 

          Section
4.48      Financial Statements. The most recent
financial statements delivered pursuant to Section 9.2(y): (a) have been
prepared in accordance with GAAP, and (b) give a true and fair view (if audited)
or fairly present (if unaudited) of its consolidated financial condition as at
the end of, and consolidated results of operations for, the period to which they
relate. 

          Section
4.49      Priority. Subject to Permitted
Encumbrances, the Security Documents have or will have first ranking priority
and none is subject to any prior ranking or pari passu ranking Lien. 

          Section
4.50      Terms and Conditions. Borrower
has received and read the Terms and Conditions of Investment Business of MBL
attached hereto as Exhibit J. 

          Section
4.51      PSA. The PSA is in full force and
effect. Borrower has not breached, and, to the knowledge of Borrower, the Seller
under the PSA is not in breach of the terms of the PSA. To Borrower’s knowledge,
all representations and warranties by Borrower and Hanson Energy contained in
the PSA are true and correct in all material respects. 

ARTICLE V 

  FINANCIAL STATEMENTS AND INFORMATION; CERTAIN
  NOTICES TO LENDER

          So
long as there are any Obligations owed to the Administrative Agent or any Lender
under this Agreement or to MBL or its Affiliates under the Swap Agreement other
than indemnity obligations that survive the termination of this Agreement, and
unless the Administrative Agent has previously consented in writing to
Borrower’s non-compliance, Borrower shall deliver to the Administrative Agent
the following items: 

          Section
5.1      Property Operating Statement. No
later than forty (40) days after the end of each calendar month a Property
Operating Statement: 

                         (a)      concurrent
with the delivery of each Property Operating Statement, statements for such
calendar month detailing, as an attachment to such Property Operating Statement,
(i) Borrower’s consolidated Cash Position, on a cash basis, as of the last day
of the immediately preceding month, and (ii) Borrower’s aged accounts payable,
in each instance presented in a format substantially similar to Exhibit D
and each prepared by Borrower and accompanied by a certification of an
authorized representative of Borrower acceptable to the Administrative Agent (an
“Authorized Officer”), dated the date of the delivery of the statement to
Administrative Agent, and further certifying that to the knowledge of the
Authorized Officer no Default exists under any provision of this Agreement or
any of the other Loan Documents; and 

                         (b)      concurrent
with the delivery of each Property Operating Statement, a list of all payments
made by Borrower to any Person (other than Administrative Agent) during the 

49 




calendar month preceding the Payment Date and indicating
whether the payment was (i) for expenses of a type described in clauses (a)–(e)
of the definition of “Net Operating Cash Flow,” or (ii) authorized under an AFE
approved by the Administrative Agent. 

          Section
5.2      Reports. Beginning with the fiscal year
ending July 31, 2008, and every year thereafter, within one hundred twenty (120)
days after the close of each fiscal year, a copy of the annual consolidated and
consolidating financial statements (including all notes) of Borrower, consisting
of a balance sheet, income statement and statement showing changes in financial
position, all audited by independent certified public accountants retained by
Borrower and reasonably acceptable to the Administrative Agent (it being
understood that Malone & Baliey, LLP is acceptable to the Administrative
Agent) and accompanied by the accountants’ certification that, in the normal
course of their audit, they have not become aware of any circumstances
constituting an Event of Default. The first audited financial statement will be
delivered on or before November 28, 2009. The fees and expenses actually paid by
Borrower to the certified public accountants retained by Borrower to prepare the
audited financial statements required by this Section 5.2 will be
accounted for as a lease operating expense for purposes of calculating Net
Operating Cash Flow. 

          Section
5.3      Quarterly Financial Reports.
Within forty-five (45) days after the end of each fiscal quarter, a balance
sheet, income statement and statement of cash flows of Borrower (including all
notes thereto) for the period from the beginning of the then current calendar
year to the end of such calendar quarter, prepared by Borrower. 

          Section
5.4      Certificate of Financial Officer;
Compliance. Concurrently with any delivery of financial statements under
Section 5.2 or Section 5.3 above, a certificate of an Authorized
Officer of Borrower in form and substance satisfactory to the Administrative
Agent (a) certifying as to whether such Authorized Officer has knowledge of
whether a Default has occurred and, if a Default has occurred, specifying the
details thereof and any action taken or proposed to be taken with respect
thereto, (b) setting forth reasonably detailed calculations demonstrating
compliance with Section 6.26 and (c) stating whether any material change
in GAAP, or in the application thereof has occurred since the date of the
audited financial statements referred to in Section 5.2 and, if any such
material change has occurred, specifying the effect of such change on the
financial statements accompanying such certificate, and (d) stating that such
financial statements present fairly in all material respects the consolidated
financial position and results of operations of Borrower on a consolidated basis
in accordance with GAAP, subject to normal year-end adjustments and the absences
of footnotes (other than those required to explain financial data). 

          Section
5.5      Default Notices. Promptly (but, in any
event, within the time periods indicated below) after becoming aware of the
existence of any Default under this Agreement or any of the Loan Documents or a
material default by Borrower under any Operating Agreement or any farmout
agreement or after becoming aware of any developments or other information
peculiar to Borrower which might reasonably be believed to have a Material
Adverse Effect, including, without limitation, the following: 

50 




                         (a)      within
ten (10) days of obtaining knowledge thereof, any material dispute (including
tax liability disputes) that may arise between Borrower and any Governmental
Authority; 

                         (b)      within
ten (10) days of obtaining knowledge thereof, the commencement of any litigation
or proceeding involving amounts in dispute in excess of Fifty Thousand Dollars
($50,000) affecting Borrower or any of the Properties; 

                         (c)      within
ten (10) days of obtaining knowledge thereof, any labor dispute or controversy
resulting in or threatening to result in a general strike or work stoppage
against Borrower; 

                         (d)      within
ten (10) days of obtaining knowledge thereof, any proposal by any Governmental
Authority to acquire any of the assets or business of Borrower by condemnation
or eminent domain; 

                         (e)      within
ten (10) days of the occurrence thereof, any change in (i) Borrower’s company
name or in any trade name used to identify such Person in the conduct of its
business or in the ownership of its Properties; (ii) the location of Borrower’s
chief executive office or principal place of business; (iii) Borrower’s identity
or company structure or in the jurisdiction in which such Person is formed; (iv)
Borrower’s jurisdiction of organization or its organizational identification
number in such jurisdiction of organization; or (v) Borrower’s federal
taxpayer identification number; 

                         (f)      within
ten (10) days of obtaining knowledge thereof, the loss of, suspension,
termination or material adverse change to any of the permits, licenses,
operating authorities and other authorizations referred to in Section
4.17 and Section 4.18; 

                         (g)      within
three (3) days of obtaining knowledge thereof, any material loss or damage to
any of the Collateral, or Borrower’s business or operations; 

                         (h)      Borrower’s
failure to make any payment when due with respect to any Debt or Borrower’s
failure to comply with any material terms of any other agreement (including,
without limitation, any Hedging Agreement or Swap Agreement) to which Borrower
is party; 

                         (i)      any
proposed sale, transfer, assignment or other disposition of any Properties
permitted prior written notice of such disposition, the price thereof and the
anticipated date of closing; 

                         (j)     
the occurrence of any loss, casualty or other insured damage to, or any
nationalization, taking under power of eminent domain or by condemnation or
similar proceeding of, any Property of Borrower having a fair market value in
excess of Fifty Thousand Dollars ($50,000); and 

                         (k)     
any other development peculiar to Borrower that results in, or could reasonably
be expected to result in a Material Adverse Effect; 

51 




in each case Borrower shall provide the Administrative Agent
with telephonic facsimile or email notice specifying and describing the nature
of the Default, development or information, and the anticipated effect. Any
notice delivered by telephone or e-mail will be confirmed in writing (or, with
respect to e mail notices, physically delivered to the Administrative Agent)
within five (5) days. 

          Section
5.6      Reserve Reports.

                         (a)     
Timing of Reports. Beginning on the First Reserve Report Effective Date
and continuing semi-annually (July 31 and January 31) throughout the term of
this Agreement and as set forth in Section 2.2(b)(ii), Borrower shall, at
its sole expense (to be accounted for as a lease operating expense in the
calculation of Net Operating Cash Flow), cause to be prepared either by the
Engineers or, if agreed in writing by Administrative Agent, by Borrower’s
in-house engineers, and delivered to the Administrative Agent, an engineering
reserve report (the “Reserve Report”) relating to the Properties. The
Reserve Reports will set forth, without limitation, the projected recoverable
reserves attributable to the Working Interests and Net Revenue Interests of
Borrower. Borrower shall deliver each Reserve Report to the Administrative Agent
within forty-five (45) days of its effective date. 

                         (b)      Preparation
of Reports. Borrower shall cause each Reserve Report to be prepared in a
manner acceptable to the Administrative Agent in all respects. For the avoidance
of all doubt, each such acceptable Reserve Report will be prepared in accordance
with at least the following assumptions: 

          (i)      reserves
shall be adjusted for cumulative production since the effective date of the most
recent Reserve Report; 

          (ii)      (A)
for all Natural Gas to be sold by Borrower other than Natural Gas described in
Section 5.6(b)(ii)(B) below, the purchase price for each calendar year
will be the average of the monthly prices provided to Borrower by Administrative
Agent for that year for Natural Gas as reflected in the New York Mercantile
Exchange, as determined by Administrative Agent in its sole discretion, Borrower
as of the settlement of the last trading day for the contract month coincident
with the effective date of the Reserve Report (as adjusted for appropriate
quality, transportation and location differentials approved by Administrative
Agent), using price escalators or de escalators existing in the market as
reasonably determined by the Administrative Agent and notified to Borrower at
the time the Reserve Report is being prepared, for the remaining life of the
Properties; 

          (B)     
for all Natural Gas to be sold by Borrower on a fixed price basis pursuant to
any bona fide contract or with respect to which the price has been hedged
pursuant to any New York Mercantile Exchange contract or bona fide price swap
agreement or arrangement, the purchase price will be the fixed price (as
adjusted for appropriate quality, transportation and location differentials
reasonably approved by the Administrative Agent) for the volumes indicated in
the contract, agreement or arrangement; 

52 




          (C)      for
Crude Oil to be sold by Borrower other than Crude Oil described in Section
5.6(b)(ii)(D) below, the purchase price for each calendar year shall be the
average of the monthly prices provided to Borrower by Administrative Agent for
that year for Crude Oil as reflected in the New York Mercantile Exchange as of
the settlement on the last trading day for the contract month coincident with
the effective date of the Reserve Report (as adjusted for appropriate quality,
transportation and location differentials reasonably approved by the
Administrative Agent), using price escalators or de escalators existing in the
market as reasonably determined by the Administrative Agent and notified to
Borrower at the time the Reserve Report is being prepared, for the remaining
life of the Properties; 

          (D)     
for Crude Oil to be sold by Borrower on a fixed price basis pursuant to any bona
fide contract or for which the price has been hedged pursuant to any New York
Mercantile Exchange contract or bona fide price swap agreement or arrangement,
the purchase price will be the fixed price (as adjusted for appropriate quality,
transportation and location differentials reasonably approved by the
Administrative Agent) for the volumes indicated in the contract, agreement or
arrangement. 

          (iii)     
reserves will be adjusted to reflect revisions to volume estimates of reserves
since the effective date of the last Reserve Report; 

          (iv)      projected
operating expenses and capital expenditures will be adjusted to reflect (A)
actual expense levels incurred since the effective date of the last Reserve
Report and (B) projected increases or decreases in anticipated operating
expenses and capital expenditure levels; 

          (v)      each
Reserve Report will separately report on PDP Reserves, PDNP Reserves and PUD
Reserves and will utilize any other assumptions that the Administrative Agent
may reasonably request from time to time; and 

          (vi)     
each Reserve Report shall be accompanied with any updates to the then existing
Development Plan. 

                         (c)      Preparation
of Additional Reserve Reports. Borrower or the Administrative Agent, at the
sole option of either of them so long as there are any Obligations owing to the
Administrative Agent or any Lender under this Agreement, may cause additional
Reserve Reports meeting the requirements of the preceding paragraph to be
prepared by any of the Engineers to be delivered to the other party. Except for
the two (2) Reserve Reports each year required in this Section 5.6(c)
which will be paid for by Borrower (and accounted for as lease operating
expenses in the calculation of Net Operating Cash Flow), the costs and expenses
of any additional reports will be borne by the party requesting the report.
Notwithstanding the foregoing, if an Event of Default has occurred and is
continuing, then the Administrative Agent may request an additional Reserve
Report to be prepared at the sole expense of Borrower. 

53 




          Section
5.7      Other Information. Borrower shall
provide the Administrative Agent and the Lenders copies of any financial
statement, report or notice furnished to or by any Person pursuant to the terms
of any preferred stock designation, indenture, loan or credit or other similar
agreement, other than this Agreement and not otherwise required to be furnished
to the Administrative Agent pursuant to any other provision of this Agreement.
Borrower shall provide any other information concerning the financial condition
of Borrower and any property of Borrower as the Administrative Agent may
reasonably request from time to time. 

          Section
5.8      Weekly Field Reports and Daily
Drilling Reports. Borrower shall, on a weekly basis, send reports on active
field operations to the Administrative Agent reported on a daily basis, in form
and substance satisfactory to Administrative Agent. Administrative Agent
reserves the right to increase the frequency of such reports at its sole
discretion. Such reports will be sent by e-mail to designated representatives of
the Administrative Agent on each Friday of every week. Active field operations
include, but are not limited to: location work, drilling, completions, Well
workovers, installation, modification or repair of surface facilities and
flowlines, and pipeline hookups. 

          Section
5.9      Weekly Production Reports. Borrower
will maintain a table of all daily production data (current and historical) for
all existing and future Well completions by Borrower in a form acceptable to
Administrative Agent. Such table will be supplied in a digital format to the
Administrative Agent at least once per week by email. Natural Gas, Crude Oil,
and water production volumes will be reported, as well as choke sizes, wellhead
pressures, hours produced and notes relating to downtime or other factors
affecting production. The daily production volumes will be based on field
estimates on as accurate a basis as practical given the production equipment and
metering devices in place. For situations where production from multiple
completions are combined upstream of measurement equipment, production volumes
for the individual completions should be estimated based on appropriate
allocations acceptable to Administrative Agent. The raw metered data,
explanatory notes and formulas related to the allocation methodology, and the
resulting allocated volumes should be included in the table supplied. 

          Section
5.10      Monthly Field Activity Reports.
Borrower shall maintain a table of all monthly Natural Gas and Crude Oil
production volumes (historical and current) for all existing and future Well
completions by Borrower. Such table will be supplied by electronic mail to
Administrative Agent, in a digital format acceptable to Administrative Agent,
within twenty-one (21) days following the end of each production month. In the
case of Natural Gas, the monthly production volumes should be based on the
integration of the charts recorded by the lease “check” meter located
downstream of the processing equipment and immediately upstream of the sales
delivery point. Any allocation of production amongst completions should be
documented as described above for the daily production table. Borrower shall
also supply a report reconciling Hydrocarbon Production Volumes (as measured by
the lease equipment) to sales volumes (reported by the Purchasers) for each of
Borrower’s existing and future Well or Lease. Such table will be supplied by
e-mail Administrative Agent, in a format acceptable to Administrative Agent,
within twenty-one (21) days following the end of each production month. 

          Section
5.11      AFEs. Borrower shall provide the
Administrative Agent for the Administrative Agent’s written approval a true and
complete copy of each AFE supported by 

54 




appropriate invoices, bids, estimates, contracts or other
documentation prior to commencing the activity contemplated by the AFE. Borrower
shall promptly notify the Administrative Agent in writing if the anticipated
expenditures contemplated by any approved AFE exceed one hundred ten percent
(110%) of the amount Advanced by the Lenders in connection with that AFE. 

          Section
5.12      Test Results; Core Analyses; Surveys
and Logs. Upon the request of any Lender, Borrower shall promptly provide
the Administrative Agent with true and complete copies of all test results,
fluid analyses, pressure surveys and core analyses related to the Properties. As
soon as such data are available, Borrower shall promptly provide the
Administrative Agent with true and correct copies of all electrical surveys,
radioactivity logs, temperature surveys, deviation or directional surveys,
caliper logs and all other logs and surveys obtained during the drilling of any
Well. In addition, promptly upon the completion of any Well, Borrower will
provide the Administrative Agent with a composite of all electrical-type logs to
the extent reasonable and customary. 

          Section
5.13      Advance Notice of Operations. To the
extent practical, Borrower will use commercially reasonable efforts to give the
Administrative Agent twenty-four (24) hours advance notice of and access to all
logging, coring, and testing operations. 

          Section
5.14      Reports Made to a Governmental
Authority. Concurrently with the delivery of any such report or application
to the applicable Governmental Authority, Borrower shall provide the
Administrative Agent a copy of each material report made and application
submitted to a Governmental Authority having jurisdiction over any of the
Properties. 

          Section
5.15      Charter Documents. Borrower shall
provide the Administrative Agent copies of all amendments or modifications to
any of its Charter Documents. 

          Section
5.16      Certificate of Authorized Officer;
Hedging Agreements. Concurrently with the delivery of each Reserve Report
hereunder, a certificate of an Authorized Officer of Borrower, in form and
substance satisfactory to the Administrative Agent, setting forth as of the
effective date of the Reserve Report, a true and complete list of all Hedging
Agreements of Borrower, the material terms thereof (including the type, term,
effective date, termination date and notional amounts or volumes), the net
mark-to-market value therefor, credit support agreements not previously
disclosed to the Administrative Agent and each of the Lenders in writing, any
margin required or supplied under any credit support document, and the
counterparty to each such agreement. 

          Section
5.17      Certificate of Insurer; Insurance
Coverage. Concurrently with any delivery of financial statements under
Section 5.2 (to the extent not previously provided to the Administrative
Agent), a certificate of insurance coverage from each insurer (or from
Borrower’s insurance broker) with respect to the insurance required by
Section 6.9 in a customary form of the type contemplated by Section
6.9 and otherwise reasonably satisfactory to the Administrative Agent, and,
if requested by the Administrative Agent or any Lender, all copies of the
applicable policies required by Section 6.9. 

          Section
5.18      Updated Development Plan.
Contemporaneous with the delivery of each Reserve Report, Borrower will prepare
and deliver to the Administrative Agent a revised, 

55 




proposed Development Plan covering at least the next twelve
(12) months and setting forth all capital expenditure development projects
proposed for that period, the anticipated timing of those projects, the net cost
of each of those projects to Borrower and such other information as the
Administrative Agent may require. Each proposed Development Plan will be subject
to the written approval of the Administrative Agent in its sole and absolute
discretion, and Borrower agrees and acknowledges that the Administrative Agent
has no obligation to approve any revised Development Plan. If and when approved
by Lender, each revised Development Plan will supersede the previously approved
Development Plan. Until the Administrative Agent has approved a revised
Development Plan, the then current, approved Development Plan shall remain in
effect (together with all AFEs approved in connection therewith). 

ARTICLE VI 

  AFFIRMATIVE COVENANTS

          Borrower
covenants and agrees that, so long as there are any Obligations owing to the
Administrative Agent or any Lender under this Agreement or under the Swap
Agreement (other than indemnity obligations and similar obligations that survive
the termination of this Agreement), or any Lender has any commitment to make
further Advances under this Agreement, and unless the Administrative Agent has
previously consented in writing to Borrower’s non-compliance, Borrower will
comply with the following covenants: 

          Section
6.1 Preservation of Existence. Borrower shall preserve and maintain its
existence and current form of organization under the laws of the State of Nevada
and all related rights, privileges and franchises. 

          Section
6.2      Affiliate Transactions. Borrower
shall not enter into any transaction with any Affiliates without the prior
written consent of Administrative Agent unless such Affiliate has executed a
Subordination Agreement with Administrative Agent, in which case, Borrower must
give no less than ten (10) days written notice to Administrative Agent in
advance of such transaction, and, if approved by Administrative Agent, Borrower
shall conduct those transactions on an arm’s length basis. 

          Section
6.3      Compliance with Law. Borrower
shall: 

                         (a)     
comply, and use commercially reasonable efforts to cause the Operators to
comply, in all material respects with all Governmental Authorities and
Governmental Requirements regarding the collection, payment and deposit of
employees’ income, unemployment and Social Security taxes and use commercially
reasonable efforts to cause the Operators to properly and timely make all
royalty or overriding royalty payments and payments to all other interest owners
in the Properties which it operates; 

                         (b)     
duly observe and conform with all laws, rules and regulations made by any
Governmental Authority, and all valid requirements of any Governmental Authority
which may acquire jurisdiction, which apply or relate to ownership and operation
of any or all of the Properties, including, without limitation, compliance with
all obligations under the Environmental and Safety Regulations, except to the
extent that any such non-compliance could not reasonably be expected to have a
Material Adverse Effect; 

56 




                         (c)     
operate or cause any Property to be operated (whether or not such Property
constitutes a “facility” as defined by CERCLA) so that no cleanup or other
obligation is required under CERCLA or other applicable Governmental Requirement
(including, without limitation, Hazardous Substance Laws), designed to protect
the environment or relating to the disposition, generation or transportation of
hazardous waste, which would constitute a Lien or charge on any property of
Borrower prior in right to that of the Administrative Agent or the Lenders. If
any claim of prior Lien or charge is made or any similar obligation arises,
Borrower will, at its own expense, (a) immediately cure or cause a third party
to immediately cure the same except for claims, Liens or charges being contested
in good faith by appropriate action and for which adequate reserves have been
maintained in accordance with GAAP, and (b) INDEMNIFY AND HOLD HARMLESS
ADMINISTRATIVE AGENT, EACH OF THE LENDERS AND THEIR RESPECTIVE RELATED PARTIES
FROM ANY RELATED LIABILITY, RESPONSIBILITY OR OBLIGATION IN CONNECTION WITH ANY
CLEANUP OR OTHER LIABILITY AS SUCCESSOR, SECURED PARTY OR OTHERWISE (REGARDLESS
OF WHETHER OR NOT THE ADMINISTRATIVE AGENT OR ANY LENDER MAY BE DEEMED TO BE AN
“OWNER OR OPERATOR” UNDER CERCLA) FOR ANY REASON INCLUDING, WITHOUT LIMITATION,
THE ENFORCEMENT OF THE ADMINISTRATIVE AGENT’S RIGHTS AS A SECURED PARTY UNDER
THE LOAN DOCUMENTS OR BY OPERATION OF LAW; 

                         (d)      comply
and use all commercially reasonable efforts to cause any Operators, agents and
invitees to comply, in all material respects, with all Environmental and Safety
Regulations with respect to Hazardous Materials, and keep all of the Properties
free and clear of any Liens imposed by those regulations except for claims,
Liens or charges being contested in good faith by appropriate action and for
which adequate reserves have been maintained in accordance with GAAP. If
Borrower receives any notice from any Person with regard to the Release of
Hazardous Materials on or from any of the Properties, Borrower shall promptly
(and, in any event, prior to the expiration of any period in which to respond to
such notice under any applicable Environmental and Safety Regulation) send a
copy of the notice to the Administrative Agent; 

                         (e)     
use all commercially reasonable efforts to cause any Operator to do or cause to
be done all things reasonably necessary to preserve and keep in good repair,
working order and efficiency (excepting ordinary wear and tear) all of its
Properties including, without limitation, all Equipment, machinery and
facilities, and from time to time will make all the reasonably necessary
repairs, renewals and replacements so that at all times the state and condition
of its Properties will be fully preserved and maintained, except to the extent a
portion of such Properties is no longer capable of producing in paying
quantities; and

                         (f)      promptly
(i) pay and discharge, or make reasonable and customary efforts to cause
to be paid and discharged, all delay rentals, royalties, expenses, severance
taxes and other taxes and indebtedness accruing under the Leases or other
agreements affecting or pertaining to its Properties, (ii) perform or
make reasonable and customary efforts to cause to be performed in all material
respects, in accordance with industry standards, the obligations required by
each and all of the assignments, deeds, Leases, sub-leases, contracts and
agreements affecting its interests in its Properties and (iii) use
commercially reasonable efforts to cause the Operators to do all other things
necessary to keep unimpaired, except for Liens described in 

57 




Section 7.5 below, all rights with respect to the
Properties and prevent any forfeiture thereof or a material default thereunder,
except to the extent a portion of such Properties are no longer capable of
producing in paying quantities. 

          Section
6.4      Environmental Matters. 

                         (a)      Borrower
shall, at its expense: (i) comply, and shall cause its Properties and operations
to comply, with all applicable Environmental Laws, the breach of which could be
reasonably expected to have a Material Adverse Effect; (ii) not dispose of or
otherwise release, any Crude Oil, Crude Oil and Natural Gas waste, Hazardous
Material, or solid waste on, under, about or from any of Borrower’s Properties
or any other property to the extent caused by Borrower’s operations except in
compliance with applicable Environmental Laws, the disposal or release of which
could reasonably be expected to have a Material Adverse Effect; (iii) timely
obtain or file all notices, permits, licenses, exemptions, approvals,
registrations or other authorizations, if any, required under applicable
Environmental Laws to be obtained or filed in connection with the operation or
use of Borrower’s Properties, which failure to obtain or file could reasonably
be expected to have a Material Adverse Effect; (iv) promptly commence and
diligently prosecute to completion any assessment, evaluation, investigation,
monitoring, containment, cleanup, removal, repair, restoration, remediation or
other remedial obligations (collectively, the “Remedial Work”) in the
event any Remedial Work is required under applicable Environmental Laws because
of or in connection with the actual or suspected past, present or future
disposal or other release of any Crude Oil, Crude Oil and Natural Gas waste,
hazardous substance or solid waste on, under, about or from any of Borrower’s
Properties, which failure to commence and diligently prosecute to completion
could reasonably be expected to have a Material Adverse Effect; and (v)
establish and implement such procedures as may be necessary to continuously
determine and assure that Borrower’s obligations under this clause (a)
are timely and fully satisfied, which failure to establish and implement could
reasonably be expected to have a Material Adverse Effect. 

                         (b)      Borrower
will promptly, but in no event later ten (10) days of the occurrence of a
triggering event, notify the Administrative Agent and the Lenders in writing of
any threatened action, investigation or inquiry by any Governmental Authority or
any threatened demand or lawsuit by any landowner or other third party against
Borrower or the Properties of which Borrower has knowledge in connection with
any Environmental Laws (excluding routine testing and corrective action) if
Borrower reasonably anticipate that such action will result in liability
(whether individually or in the aggregate) in excess of Fifty Thousand Dollars
($50,000), not fully covered by insurance, subject to normal deductibles. 

                         (c)      Borrower
will provide environmental audits and tests in accordance with applicable
American Society of Testing Materials standards upon request by the
Administrative Agent and the Lenders and no more than once per year in the
absence of any Event of Default (or as otherwise required to be obtained by the
Administrative Agent or the Lenders by any Governmental Authority), in
connection with any future acquisitions of any other Properties. 

          Section
6.5      Records. Borrower shall keep
adequate records and books of account with respect to its business activities
and the Properties in which proper entries are made in accordance with GAAP,
reflecting all financial transactions of Borrower. Borrower shall keep 

58 




separate books and records than its Affiliates and shall
conduct its business separately from the business of its Affiliates. 

          Section
6.6      Litigation. Borrower shall give
the Administrative Agent prompt written notice of any suit at law or in equity
or any investigation or proceeding before or by any Governmental Authority
arising after the date hereof and known to Borrower that could: 

                         (a)      limit,
prohibit or restrict in any material respect the manner in which Borrower
presently conduct business; or 

                         (b)      declare
any substance contained in any product used, sold or distributed by Borrower to
be a Hazardous Material in violation of Hazardous Substance Laws. 

          Section
6.7      Damage to Collateral. Upon
obtaining knowledge thereof, Borrower shall give the Administrative Agent prompt
written notice of: 

                         (a)      damage
to any of the Collateral causing a loss in excess of Fifty Thousand Dollars
($50,000); and 

                         (b)      the
occurrence of any condition or event which has caused or may reasonably be
expected to cause loss or depreciation in excess of Fifty Thousand Dollars
($50,000) with respect to any of the Collateral excluding changes in market
conditions such as market fluctuation for the price paid for Hydrocarbons. 

          Section
6.8      Solvency. Borrower shall conduct all
operations in a manner as is necessary to remain Solvent. 

          Section
6.9      Insurance. Borrower shall: 

                         (a)      continuously
keep all Personal Property together with all improvements on real property
insured for replacement value of like kind and quality with insurance companies
licensed or approved to do business in the jurisdictions in which the Properties
are located with a Best’s Rating of A or better, or as otherwise reasonably
satisfactory to the Administrative Agent, against loss or damage by fire or
other risk usually insured against by other prudent owners in similar businesses
similarly situated under extended coverage endorsement and against theft,
burglary, and pilferage together with other insurance covering any other hazards
as the Administrative Agent may from time to time reasonably request; 

                         (b)     
deliver certificates of insurance and copies of insurance policies as required
under Section 5.17 above. All such insurance shall contain endorsements
in form satisfactory to the Administrative Agent showing the Administrative
Agent as a loss payee and additional insured as its interest may appear. Subject
to Section 2.13(b)(v) above, all casualty and property damage insurance
proceeds received by the Administrative Agent will be retained (or, if Borrower
receives any such insurance proceeds, it shall promptly deposit such insurance
proceeds into the Project Account to be retained) by the Administrative Agent at
its option, for application to the payment of such portion of the Obligations as
the Administrative Agent may determine in its reasonable discretion or shall be
applied to repair, restore or replace any such insurable loss or damage,
provided that the proceeds of the insurance shall be deposited in the 

59 




Borrower Sub-Account and, so long as no Event of Default shall
have occurred and be continuing, at the request of Borrower, such proceeds shall
be disbursed to Borrower upon such terms and conditions as the Administrative
Agent may deem appropriate for its protection to pay the cost of repairing,
replacing or restoring Collateral or purchasing replacement Collateral; 

                         (c)      promptly,
upon becoming aware thereof, notify the Administrative Agent of the occurrence
or existence of an event justifying a material claim under any insurance and the
estimated amount thereof. In furtherance, but not in limitation of the
requirements of the preceding sentence, Borrower shall continuously keep and
maintain in full force and effect during the term of this Agreement, at
Borrower’s sole cost and expense, original insurance policies for which the
payment of premiums are current containing waivers of subrogation by the
respective insurers and non contributory standard mortgagee clauses or their
equivalent or a satisfactory mortgagee loss payable endorsement in favor of the
Administrative Agent providing the types of insurance covering each of the
Properties and the interest and liabilities incident to the ownership,
possession and operation thereof as specified on Schedule 6.9(c), in each
case to the extent such insurance is available on commercially reasonable terms;


                         (d)      deliver
to the Administrative Agent all certificates of insurance (and if requested by
Administrative Agent, copies of all insurance policies and endorsements) which
are required to be obtained and maintained by Borrower. Such certificates shall
show that (i) such insurance is in full force and effect in accordance with the
provisions of this Agreement, (ii) such insurance is non cancelable without at
least fifteen (15) days prior written notice to the Administrative Agent sent by
United States registered or certified mail, return receipt requested, and (iii)
written notice shall be sent to the Administrative Agent in the same manner at
least fifteen (15) days prior to any non renewal of such policies; 

                         (e)      to
the extent available on commercially reasonable terms, obtain at least fifteen
(15) days prior to the expiration date of each policy maintained pursuant to
this Section 6.9(e) hereof, a renewal or replacement thereof and
deliver to the Administrative Agent a certificate of such renewal or replacement
policy; and 

                         (f)     
notwithstanding the foregoing, Borrower shall at all times employ industry
standard practices for insurance coverages to include, but not limited to,
drilling, workovers, flowline repairs, rig work and facilities work. Borrower
will exercise commercially reasonable efforts to ensure that third-party
operators also carry such insurance coverages. To the extent Borrower’s existing
coverage is not in compliance or falls below those standard for the industry as
determined by Administrative Agent, Borrower shall promptly act to increase, if
necessary, insurance coverages and coverage amounts to come into compliance with
industry standards, in each case to the extent such insurance is available on
commercially reasonable terms. 

          Section
6.10      Delivery of Instruments. Borrower
shall deliver to the Administrative Agent upon its request copies of all
contracts, statements, invoices, notices, receipts and vouchers under which
Borrower has incurred or are to incur costs in excess of Twenty-Five Thousand
Dollars ($25,000), and deliver to the Administrative Agent all other data or
documents in connection with Borrower’s operations as the Administrative Agent
may from time to time reasonably request. 

60 




          Section
6.11      Consultants. Borrower shall accord to
the Administrative Agent, to be exercised in the reasonable discretion of the
Administrative Agent, with prior written notice to Borrower (except upon the
occurrence and during the continuation of an Event of Default, in which case no
prior written notice is required), from time to time to select and retain
consultants, including engineers and public accountants, to advise the
Administrative Agent and the Lenders as to technical and financial matters
pertaining to Borrower’s operations relating to the Properties and Borrower’s
financial records. Upon Borrower’s receipt of verifying invoices therefor, the
reasonable fees and costs charged by the Administrative Agent’s consultants will
be paid by Borrower, which may be paid out of Net Operating Cash Flow as lease
operating expense. Borrower shall allow such consultants access (at such
consultant’s risk) during normal business hours and, if no Event of Default
exists, upon three (3) Business Days notice, to the Properties and all other
facilities owned, operated or used by Borrower in connection with the Properties
or the conduct of Borrower’s business and to Borrower’s records (financial or
otherwise) relating to the operation of the Properties, subject to such
consultants following Borrower’s reasonable safety policies and prudent operator
standards and agreeing to maintain the confidentiality of all such records and
the information acquired as a result of such access. The access granted to the
Administrative Agent, the Lenders and their consultants under this Section
6.11 will not unreasonably disrupt the business of Borrower or the operation
of the Properties. 

          Section
6.12      Creditors. Borrower shall promptly,
upon the Administrative Agent’s request, provide the Administrative Agent with a
statement showing the identity of Borrower’s creditors, the amount due to each,
and the date each payment is due. Borrower shall notify the Administrative Agent
immediately if Borrower fails to make any payment (other than a contested
payment) in accordance with required terms to lessors, suppliers, vendors,
owners of Royalty Interests, third party Working Interest owners, Taxing
Authorities or others relating to the Properties, including, without limitation,
owners or holders of net profits interests, production payments, or any other
Liens or burdens on or relating to the Properties, where non payment would
create any Lien rights against any item of Collateral or otherwise interfere
with or jeopardize performance by Borrower under this Agreement. Upon the
Administrative Agent’s receipt of a notice of non-payment from Borrower, Lenders
may, but need not, make any payments or agree to pay any persons as are
required, in the reasonable opinion of the Administrative Agent, to enable such
Borrower to complete performance under this Agreement or to protect the
interests of Lenders in production from or allocable to Borrower’s Net Revenue
Interest in the Properties or other Collateral, and those payments will be
immediately reimbursed to the Administrative Agent, for the ratable benefit of
the Lenders, by Borrower on demand. Borrower’s obligation to reimburse any such
payments will be secured by the security interests and the Liens granted under
the Security Documents. 

          Section
6.13      Inspection. Borrower shall, so long as
any Obligation remains owing to the Administrative Agent or any Lender or any
Collateral remains located at any of the Properties or other facilities owned or
leased by Borrower, accord the Administrative Agent and each of the Lenders or
their respective agents full and unrestricted access (at the Administrative
Agent’s or such Lender’s risk, as applicable) upon the giving of reasonable
notice under the circumstances (subject to reasonable safety restrictions and in
accordance with prudent operator standards and subject to the Administrative
Agent’s and Lenders’ obligations under Section 13.5 below to maintain the
confidentiality of information obtained thereby) during normal business 

61 




hours to the Properties and such other facilities to permit the
Administrative Agent and each of the Lenders or their respective agents to,
among other things, witness drilling, workovers and other field activities and
inspect production. Borrower shall give the Administrative Agent and each of the
Lenders or their respective agents due notice of drilling, workovers and other
field activities to permit the Administrative Agent and each of the Lenders or
their respective agents to exercise its rights under this Section 6.13.
The access granted to the Administrative Agent and each of the Lenders and their
respective agents under this Section 6.13 will not unreasonably disrupt
the business of Borrower or the operation of the Properties. 

          Section
6.14      Compliance Opinions and Reports.
Borrower shall, upon the Administrative Agent’s reasonable request (and not more
than once each calendar year unless an Event of Default exists, in which case
the Administrative Agent may request such opinions and/or reports as it may
reasonably determine), obtain opinions and/or reports, as designated by the
Administrative Agent, from counsel or other consultants reasonably satisfactory
to the Administrative Agent that Borrower has all permits, licenses and other
approvals required by all applicable Governmental Authorities, and the current
and planned operation of the Properties is in compliance with all Governmental
Requirements. The cost and expense of preparation of such opinions and reports
shall be accounted for as a lease operating expense in the calculation of Net
Operating Cash Flow. 

          Section
6.15      Operators. To the extent Borrower has
the legal right to do so (or to cause or require any other Person to do so)
Borrower shall, in the event of a material breach by any Operator under the
respective Operating Agreement that is not timely cured in accordance with the
terms of that Operating Agreement or upon the occurrence of an Event of Default
under this Agreement: 

                         (a)     
immediately, upon the request of the Administrative Agent, vote to remove the
Operator or to commence any proceedings necessary under the applicable Operating
Agreement to remove the Operator or assign to the Administrative Agent its right
to vote to remove the Operator with respect to the Properties, 

                         (b)      seek
indemnification or damages from the Operator and its successors or assigns for
any loss or liability incurred by Borrower, 

                         (c)      pay
the owners of Royalty Interests directly, 

                         (d)      deliver
or use all commercially reasonable efforts to cause the Operator to deliver to
any successor Operator all books, agreements, contracts, papers, records
(including but not limited to royalty payment records, computerized tapes and
other royalty payment information), division orders, farm in and farmout
agreements, and all other records, contracts, agreements, papers or documents,
written, printed or computerized, which may be pertinent in any way to the
operations to be conducted by the successor Operator or which may have been
conducted by the former Operator, 

                         (e)      cooperate,
and use all commercially reasonable efforts to cause the Operator to fully
cooperate with the successor Operator to ensure that the Leases are not
terminated or the value of the Properties diminished by virtue of the
resignation or removal, and 

62 




                         (f)     
take all other actions and use all commercially reasonable efforts to cause the
Operator to take all other actions necessary to ensure an orderly transition of
all operations to the successor Operator. Borrower shall promptly reimburse the
Administrative Agent, for the ratable benefit of the Lenders, for any payments
made by the Administrative Agent or Lenders pursuant to this Section
6.15. The rights and remedies of the Administrative Agent and the Lenders
under this Section 6.15 are in addition to any other rights or remedies
available under Article XI or elsewhere in this Agreement. 

          Section
6.16      Purchasers of Hydrocarbons.
Borrower shall: 

                         (a)     
in the event that any Purchaser of Hydrocarbons is, in the Administrative
Agent’s reasonable judgment, not creditworthy, upon the request of the
Administrative Agent, (i) cause the Purchaser to provide one or more letters of
credit, in form and substance and from a bank satisfactory to the Administrative
Agent in connection with its purchase of Hydrocarbons from the Properties, (ii)
sell Hydrocarbons only to Purchasers who are creditworthy in the Administrative
Agent’s reasonable judgment or who prepay, or (iii) exercise its right to take
the Hydrocarbons in kind and sell to Purchasers of Hydrocarbons who are
creditworthy in the Administrative Agent’s reasonable judgment; to the extent
Borrower is legally entitled to take such action; 

                         (b)     
after the date of this Agreement, give the Administrative Agent thirty (30) days
prior written notice if a Person listed on Exhibit E will become a
Purchaser of Hydrocarbons. The notice will contain the Person’s name and address
(including contact person) and specify the Property or Properties to which the
purchases relate. 

          Section
6.17      Access to Officers, Employees and
Agents. Borrower shall allow the Administrative Agent and each of the
Lenders reasonable access to appropriate officers, employees and agents of
Borrower to discuss the affairs, finances and accounts of Borrower at all
reasonable times and as often as the Administrative Agent or any of the Lenders
may reasonably request. 

          Section
6.18      Use of Proceeds; Development of
Properties. Borrower shall use all amounts Advanced under the Loan solely
for the purposes described in this Agreement and as included on any AFEs and
other supporting documentation provided to the Administrative Agent in
connection with each Advance Request. Borrower shall diligently develop the
Properties in accordance with the applicable AFE. 

          Section
6.19      Bonds. Borrower shall maintain in full
force and effect all qualifications, bonds, permits and approvals required by
any Governmental Authority necessary to own and operate the Properties, and
deliver to the Administrative Agent certificates evidencing any bonds and copies
of any bonds in place (including renewals) as well as all bonds required by any
applicable Governmental Authority. Schedule 6.19 identifies (a) each of
the bonds, permits and qualifications maintained by Borrower or Operator in
connection with the ownership and operation of the Properties and compliance
with Governmental Requirements and (b) all payment obligations of Borrower to
applicable bonding agent(s). 

63 




          Section
6.20      Hedging Hydrocarbon Production.
Borrower shall, at the request of the Administrative Agent, enter into a Swap
Agreement or Hedging Agreement in form and substance approved by the
Administrative Agent (such approval not to be unreasonably withheld or delayed)
such that a percentage (not to exceed eighty-five percent (85%)) of the volume
of PDP Reserves volumes projected to be produced prior to the Maturity Date are
dedicated to a price risk management program approved by the Administrative
Agent. Any gain or loss for volume adjustments will be for Borrower’s account.
The Administrative Agent may review the adequacy of Borrower’s price hedge
position at any time to determine if it is in compliance with this Section
6.20. Notwithstanding the foregoing, within thirty (30) days of Closing,
Borrower shall have entered into a Swap Agreement or Hedging Agreement, in form
and substance approved by Administrative Agent, for fifty percent (50%) of
Borrower’s PDP Reserves at an average price of US $120/bbl for a period of
thirty-six (36) months. 

          To
the extent Borrower enters into any hedging agreements pursuant to the Swap
Agreement which extend beyond the Maturity Date, the Obligations under the Swap
Agreement shall continue to be secured by the Security Documents notwithstanding
payment of the Loan. 

          Section
6.21      Minimum Payments. Borrower shall pay
to the Administrative Agent, for the ratable benefit of each of the Lenders,
interest at the rate specified in this Agreement on all Obligations (including
Obligations which are for fees or to reimburse Related Costs or indemnify the
Administrative Agent or the Lenders) on each Payment Date. 

          Section
6.22      Post-Closing Title Opinions. 

                         (a)     
Within thirty (30) days after Closing, Borrower will deliver to the
Administrative Agent updated title opinions and title information covering the
Properties in accordance with Section 6.22(b) below. Notwithstanding the
previous sentence, however, no Advance will be made by the Lenders with respect
to any Well or proposed Well that is not the subject of an updated title opinion
reasonably satisfactory to the Administrative Agent. 

                         (b)     
The opinions to be delivered under this Section 6.22 will show Defensible
Title in the Properties vested in Borrower subject only to (i) the Permitted
Encumbrances and (ii) the Mortgages in favor of the Administrative Agent as
first and prior mortgage Liens subject only to the Permitted Encumbrances and
will otherwise be satisfactory to the Administrative Agent and its counsel. 

          Section
6.23      Continuing Enterprise. Borrower
shall continue to conduct operations on such a scale and in such a manner as is
necessary to (a) perform the obligations under this Agreement, the other Loan
Documents and the Basic Documents, and (b) preserve all rights to the Properties
and all rights under the Basic Documents unless a prudent operator would not do
so. 

          Section
6.24      Venue for Debtor Relief
Proceedings. In the event Borrower voluntarily commences any proceeding
under any Debtor Relief Law, such Borrower shall initiate and maintain the
proceeding in a court within the Southern District of Texas. 

          Section
6.25      Access to Seismic and Geophysical
Data. To the maximum extent allowed under applicable seismic licenses and
without substantial additional expense to 

64 




Borrower, Borrower shall provide the Administrative Agent, the
Lenders and their respective engineering consultants with access to all
engineering, seismic, geological and geophysical data, studies and evaluations
which Borrower or any of its Affiliates possess or to which any of them has
access. The Administrative Agent and Lenders will, upon reasonable notice to
Borrower, have access to these records during Borrower’s regular business hours;
provided, however, to the extent the information to be made
available to the Administrative Agent and Lenders under this Section 6.25
is subject to a confidentiality agreement, Borrower may require the
Administrative Agent and Lenders to execute and deliver to it a mutually
acceptable confidentiality agreement prior to being allowed access to the
confidential information. 

          Section
6.26      Financial Ratios.

                         (a)      Interest
Coverage Ratio. Beginning January 31, 2009, Borrower shall maintain an
Interest Coverage Ratio of at least 2.50 to 1.00, and commencing with the fiscal
quarter ending July 31, 2009 and every fiscal quarter thereafter Borrower shall
maintain an Interest Coverage Ratio of at least 3.00 to 1.00. 

                         (b)     
Current Ratio. Beginning with the fiscal quarter ending October 31, 2008,
Borrower shall at all times maintain a Current Ratio of at least 1.00 to 1.00.


                         (c)      Adjusted
PV Ratio. Beginning on the First Reserve Report Effective Date Borrower
shall maintain an Adjusted PV Ratio of not less than 1.5 to 1.0 and commencing
on July 31, 2009 and thereafter Borrower shall maintain an Adjusted PV Ratio of
not less then 2.0 to 1. 

          Section
6.27      Liens on Collateral. Borrower will at
all times cause all Collateral (whether real, personal or mixed, tangible or
intangible) of Borrower to be subject to a first-priority perfected Lien,
subject only to Permitted Encumbrances, in favor of or for the benefit of the
Administrative Agent on behalf of Lenders pursuant to the Security Documents. In
the event Borrower acquires Property after the Closing Date, Borrower shall
promptly notify Lenders of such acquisition and execute appropriate Security
Documents to grant Lenders a lien and security interest in such Property. 

          Section
6.28      Use of Additional Equity. In the
event that Borrower receives any additional capital contributions or other
infusions of equity, Borrower will only use the proceeds of such capital
contributions or equity infusions (a) to repay the Obligations, (b) to pay the
amounts described in clauses (a)-(e) of the definition of Net Operating Cash
Flow, (c) to fund capital expenditures of the Borrower to the extent not funded
by an Advance under the Loan, (d) to repay Subordinated Debt so long as no
default or Event of Default then exists or would be caused thereby and otherwise
to the extent permitted under the Subordination Agreement or (e) for such other
uses approved by the Administrative Agent in writing. 

          Section
6.29      Payment of Taxes, Etc. Borrower shall
pay all costs to be paid on taxes, assessments, governmental charges or private
encumbrances levied, assessed, imposed or payable upon or with respect to any of
the Collateral except for taxes, assessments, charges or encumbrances being
contested in good faith by appropriate action and for which adequate reserves
are maintained in accordance with GAAP. 

65 




          Section
6.30      Equipment.

                         (a)     
Preservation of Equipment. All Equipment currently owned or hereafter
acquired by or on behalf of Borrower will be kept at the applicable Property or
other places of business of Borrower in the State of New Mexico except as
permitted by this Agreement or the applicable Mortgage or except with the prior
written consent of Administrative agent, provided, however,
Borrower or the Operator may dispose of Equipment in accordance with the terms
of any applicable Operating Agreement and may dispose of obsolete, broken or
worn Equipment without Administrative Agent’s consent but upon prompt
notification to Administrative Agent. Borrower shall use reasonable commercial
efforts to cause the Operator at all times to (i) keep correct and accurate
records itemizing and describing the location, kind, type, age, condition and
cost of and accumulated depreciation on all Equipment relating to the subject
Operating Agreement and (ii) make those records available during the Operator’s
usual business hours upon prior written notice to any of the officers, employees
or agents of Borrower and Administrative Agent. 

                         (b)     
Sale or Disposal of Equipment. Where Borrower is permitted to dispose of
any Equipment, it shall do so or shall cause the Operator to do so, at
arm’s-length, in good faith and by obtaining the maximum amount of recovery
practicable and without impairing the operating integrity of the remaining
Equipment. 

          Section
6.31      Deposit Account. Within thirty (30)
days of Closing, Borrower shall have established a deposit account at Citibank
(Midland, Texas) and a Deposit Account Control Agreement, in form and substance
satisfactory to Administrative Agent, shall have been executed and delivered to
Administrative Agent. 

ARTICLE VII 

  NEGATIVE COVENANTS

          So
long as there are any Obligations owing to the Administrative Agent or any
Lender under this Agreement or the Swap Agreement (other than indemnity
obligations and similar obligations that survive the termination of this
Agreement), and unless the Administrative Agent has previously consented in
writing to Borrower’s non-compliance, Borrower shall not: 

          Section
7.1      Debt. Create, incur, assume or suffer
to exist any Debt, except: 

                         (a)      the
Obligations to the Administrative Agent and the Lenders; 

                         (b)      Capital
Leases which do not exceed One Hundred Thousand Dollars ($100,000) in the
aggregate, each of which is identified on Schedule 7.1(b) (including such
updates to Schedule 7.1(b) that are prepared by Borrower from time to
time); 

                         (c)      obligations
secured by Permitted Encumbrances; 

                         (d)      Debt
in connection with a Hedging Agreement permitted or required in accordance with
this Agreement; 

66 




                         (e)      accounts
payable and accrued expenses, liabilities or other obligations to pay the
deferred purchase price of property or services, from time to time incurred in
the ordinary course of business which are (a) not delinquent or otherwise
greater than sixty (60) days past due and do not exceed One Hundred Thousand
Dollars ($100,000) in the aggregate or (b) being contested in good faith by
appropriate action and for which adequate reserves have been maintained in
accordance with GAAP; 

                         (f)      letters
of credit, surety or other bonds incurred in the ordinary course of business
approved in writing by Administrative Agent; 

                         (g)     
endorsements of negotiable instruments for collection in the ordinary course of
business; or 

                         (h)     
the Subordinated Debt and other Debt incurred with the prior written consent of
the Administrative Agent, such consent not to be unreasonably withheld or
delayed, and fully subordinated to the Obligations pursuant to a Subordination
Agreement. 

          Section
7.2      Accounts. Sell, discount or factor
its accounts, instruments, intangibles, Leases or chattel paper, except for
accounts that are settled for less than the amount thereof, discounted or
extended in each case in the ordinary course of business so long as no Default
or Event of Default has occurred and is continuing. 

          Section
7.3      Guaranties. Other than Debt permitted
by Section 7.1 and indemnity, cleanup and other obligations of a
customary nature assumed or incurred (excluding Debt for Borrowed money) in
favor of any seller of the Leases or related property, assume, guaranty or
endorse or otherwise become directly or contingently liable for any liability of
any other Person except for the indemnification obligations contained in this
Agreement and the Security Documents. The preceding sentence will not prohibit
the endorsement of negotiable instruments for deposit or collection or the
incurrence of obligations under the Operating Agreements and similar
transactions in the ordinary course of business. For purposes of this Section
7.3, the term “guaranty” includes any agreement, whether contingent
or otherwise, to purchase, repurchase or otherwise acquire any obligation or
liability of any other Person, or to purchase, sell or lease, as lessee or
lessor, property or services, in any case primarily for the purpose of enabling
another Person to make payment of any debt or liability, or to make any payment
(whether as a capital contribution, purchase of an equity interest or otherwise)
to assure a minimum equity, asset base, working capital or other balance sheet
or financial condition, in connection with a debt or liability of another
Person, or to supply funds to or in any manner invest in another Person in
connection with that Person’s debts or liabilities. 

          Section
7.4      Ownership and Business Operations.

                         (a)      without
the prior written consent of Administrative Agent, suffer any Change of Control
or merge into or consolidate with any other Person; 

                         (b)      acquire
or agree to acquire all or any material portion of the Equity Interests or
assets of any other Person; 

67 




                         (c)      sell,
transfer, assign, or grant any Person an option to acquire, any of its assets
(as that term is defined in accordance with GAAP) having a fair market value,
individually or in the aggregate, greater than Two Hundred Thousand Dollars
($200,000), in any six (6) month period, or take any similar action except for
the sale of production or inventory or of worn-out or obsolete equipment or
assets in the ordinary course of Borrower’s business; 

                         (d)     
cancel any claim or Debt during the term of the Loan, except for consideration
and in the ordinary course of its business; 

                         (e)      except
as expressly permitted by this Agreement, prepay any Debt other than the
Obligations owing to the Administrative Agent and the Lenders hereunder; 

                         (f)      cause
or suffer to exist a default by Borrower under any of the Basic Documents if
such default could reasonably be expected to have a Material Adverse Effect;


                         (g)      make
any loan or advance or extend any credit during the term of the Loan (except in
the ordinary course of business) to any Person, whether or not an Affiliate of
Borrower; 

                         (h)     
transfer executive offices, change its company name or reorganize as an entity
other than its current form of organization in a jurisdiction other than the
jurisdiction under which Borrower is organized on the date of this Agreement
except upon at least thirty (30) days prior written notice to the Administrative
Agent; 

                         (i)      change
its fiscal year; 

                         (j)      to
the extent within Borrower’s capabilities to do so using commercially reasonable
efforts, allow (i) the abandonment of any Well capable of commercial
production, or the release or abandonment of all or any part of Borrower’s
Working Interest or Net Revenue Interest in any of the Properties capable of
commercial production, or release or abandon all or any portion of the
Properties except in accordance with prudent operator standards; (ii)
Borrower’s Net Revenue Interest in the Properties to be developed, maintained or
operated in a manner less favorable than prudent operator standards taken as a
whole; and (iii) without the prior written consent of the Administrative
Agent, such consent not to be unreasonably withheld or delayed, make any
material alterations in the Basic Documents except as made by an Operator on
behalf of Borrower pursuant to the terms of an Operating Agreement or to the
extent that such alteration could not be expected to cause a Material Adverse
Effect; 

                         (k)      except
in the ordinary course of business or as otherwise permitted under this
Agreement, without the prior written consent of the Administrative Agent (such
consent not to be unreasonably withheld or delayed), enter into any new
agreement or contract with any Person relating to or affecting any of the
Properties that could reasonably be expected to be material in the context of
any particular Lease; 

                         (l)      enter
into any farmout agreements with any Person relating to the Properties without
the written consent of Administrative Agent, which consent shall not be
unreasonably withheld; 

68 




                    (m)     
to the extent within its capabilities to do so using commercially reasonable
efforts, allow the commencement of any operation other than pursuant to an AFE
approved in writing by the Administrative Agent excluding emergency operations,
operations required under presently existing contractual obligations, operations
necessary to ensure compliance with any governmental safety and environmental
regulations and under any applicable Governmental Requirement; or 

                         (n)      to
the extent of its rights to do so and subject to Section 6.15, permit, or
fail or refuse to prohibit, a change in Operator with respect to any of the
Properties. 

          Section
7.5      Liens and Encumbrances. Except as set
forth on Schedule 7.5: 

                         (a)      suffer
to exist any Lien or consent to the filing of any financing statement on any of
its property (including Borrower’s Working Interest or Net Revenue Interest in
the Properties) other than 

          (i)      the
Liens created by and granted to or for the benefit of the Lenders under this
Agreement and the Security Documents; 

          (ii)      the
Permitted Encumbrances; 

          (iii)     
Liens being contested in good faith by appropriate action and for which adequate
reserves have been maintained in accordance with GAAP; or 

          (iv)     
Liens securing Capital Leases permitted by Section 7.1(b) and identified
on Schedule 7.1(b). 

                         (b)      dedicate,
sell, encumber or dispose of, or suffer to exist any agreement for the sale,
disposition or encumbrance of, Borrower’s Working Interest and/or Net Revenue
Interest in the Properties or of any Hydrocarbon production attributable to
Borrower’s Working Interest or Net Revenue Interest in the Properties except in
the ordinary course of business; or 

                         (c)      reserve
any recorded or unrecorded executory rights in Borrower’s Working Interest or
Net Revenue Interest in the Properties except as consented to in writing by the
Administrative Agent. 

          Section
7.6      Investments. Make or suffer to exist,
any Investment except Investments in certificates of deposit or other
obligations issued by an Acceptable Bank or obligations of the United States
government or any agency thereof. 

          Section
7.7      Subsidiaries and Divestitures.
Create any direct or indirect Subsidiary or divest any material assets by (a)
transferring them to any future Subsidiary or (b) by entering into a
partnership, joint venture, or similar arrangement. Borrower shall not make any
material change in capital structure or enter into any management contract
permitting a third party to exercise management rights with respect to
Borrower’s business, other than pursuant to the Operating Agreements, without
the written consent of Administrative Agent, which consent shall not be
unreasonably withheld. 

69 




          Section
7.8      Compliance with Laws. Borrower
shall not (a) violate any Environmental and Safety Regulation in any manner
which could reasonably be expected to have Material Adverse Effect; or (b) use
or permit the use of any of the Properties to generate, treat, store, handle,
transport or dispose of Hazardous Materials except in compliance in all material
respects with all applicable Environmental and Safety Regulations, and which the
failure to so comply could reasonably be expected to have a Material Adverse
Effect. Upon the occurrence of any Release of Hazardous Materials, Borrower
shall promptly commence and perform, or cause to be promptly commenced and
performed, without cost to Administrative Agent, all investigations, studies,
sampling and testing, and all remedial, removal and other actions reasonably
necessary to clean up and remove all Hazardous Materials to comply with the
requirements of all applicable Environmental and Safety Regulations. 

          Section
7.9      Dividends and Distributions.

                         (a)     
declare or pay any cash dividends or distributions;

                         (b)      declare
or make any non-cash distribution; 

                         (c)      purchase
or redeem any of its Equity Interests or other securities; 

                         (d)     
take any other action that has substantially the same effect as any of the
actions prohibited under items (a)-(c) above. 

          Section
7.10      Modifications. Borrower shall not
alter, amend or cause the alteration or amendment of any of the Loan Documents,
any Operating Agreement, any Hedging Agreement or any material Basic Document
without the prior written consent of Administrative Agent. 

          Section
7.11      Development Expenditures. In
connection with the development of the Properties, Borrower shall not expend any
proceeds of the Loan for activities not expressly provided for herein or
included on an AFE approved in writing by Administrative Agent as provided
herein. 

          Section
7.12      Quarterly Minimum Cumulative Net
Operating Cash Flow. Allow the Net Operating Cash Flow during any applicable
period to fall below the amounts set forth on Schedule 7.12 for the
periods of time set forth therein. 

          Section
7.13      Quarterly Minimum Cumulative Production
Volumes. Allow its Production Volumes sold and attributable to the
Properties to fall below the amounts set forth on Schedule 7.13, as
measured on a MBOE basis, for the periods of time set forth therein. 

          Section
7.14      Other.

                         (a)      fail
to observe all of the provisions of Article V and VI of this
Agreement after the Closing, to the extent not already subsumed in this
Article VII; 

                         (b)     
declare an “Early Termination Date” (as that term may be defined in the Swap
Agreement) or any similar action pursuant to any Hedging Agreement without the
prior written consent of the Administrative Agent, such consent not to be
unreasonably withheld or 

70 




delayed; provided that Borrower may declare an Early
Termination Date or any similar action under and in accordance with the terms of
any Hedging Agreement (i) in respect of any “Event of
Default” (as defined in such Hedging Agreement) by the counterparty to such
Hedging Agreement or (ii) in order to close out any transactions then
outstanding under such Hedging Agreement and pay all amounts due in connection
with the close out of such transactions coincident with the full and final
repayment or prepayment of all of the Obligations; 

                         (c)     
enter into any Hedging Agreement not approved in writing by the Administrative
Agent such approval not to be unreasonably withheld or delayed; 

                         (d)     
enter into a unit operating agreement relating to the Properties outside the
ordinary course of business without the written consent of the Administrative
Agent such consent not to be unreasonably withheld or delayed; 

                         (e)     
except as authorized in this Agreement or pursuant to any Operating Agreement
now existing or hereafter approved in writing by the Administrative Agent (such
approval not to be unreasonably withheld or delayed) for which Borrower has no
election or as permitted by Section 6.28 above, make expenditures on
capital projects in excess of One Hundred Thousand ($100,000) that have not been
approved in writing by the Administrative Agent; or 

                         (f)      adopt
any Employee Plan without written approval of Administrative Agent. 

          Section
7.15      Proceeds of Notes. Permit the proceeds
of the Notes to be used for any purpose other than those permitted by Section
2.2. Neither Borrower nor any Person acting on behalf of Borrower has taken
or will take any action which might cause any of the Loan Documents to violate
Regulations T, U or X or any other regulation of the Board or to violate Section
7 of the Securities Exchange Act of 1934 or any rule or regulation thereunder,
in each case as now in effect or as the same may hereinafter be in effect. If
requested by the Administrative Agent, the Borrower will furnish to the
Administrative Agent and each Lender a statement to the foregoing effect in
conformity with the requirements of FR Form U-1 or such other form referred to
in Regulation U, Regulation T or Regulation X of the Board, as the case may be.


          Section
7.16      Limitation on Leases. Create, incur,
assume or suffer to exist any obligation for the payment of rent or hire of
property of any kind whatsoever (real or personal but excluding Capital Leases
and leases of Hydrocarbon Interests), under leases or lease agreements which
would cause the aggregate amount of all payments made by Borrower pursuant to
all such leases or lease agreements, including, without limitation, any residual
payments at the end of any lease, to exceed Seventy-five Thousand Dollars
($75,000) in any period of twelve consecutive calendar months during the life of
such leases. 

          Section
7.17      Nature of Business. Allow any material
change to be made in the character of Borrower’s business as an independent
Hydrocarbon exploration and production company. Borrower will not acquire or
make any other expenditure (whether such expenditure 

71 




is capital, operating or otherwise) in or related to, any oil
and gas properties not located within the geographical boundaries of the United
States. 

          Section
7.18      Deposit Accounts. Except for those
identified on Schedule 4.42, maintain any additional deposit accounts (as
defined in the UCC) without the prior written approval of Administrative Agent.


          Section
7.19      No Severance Agreements. Without
the prior written approval of Administrative Agent, enter into or become bound
by or cause or allow any of the Collateral to become subject to any agreement
under which Borrower could become obligated to pay any amounts or make the
accommodations to any Person, in connection with that Person’s resignation,
termination or any similar occurrence. 

          Section
7.20      G&A Expenses. Allow G&A
Expenses to exceed the G&A Cap. 

          Section
7.21      Commodity Deliveries. Enter into
obligations to deliver commodities, goods or services, including, without
limitation, Hydrocarbons, in consideration of one or more advance payments,
other than gas balancing arrangements in the ordinary course of business. 

ARTICLE VIII 

  FURTHER RIGHTS OF LENDERS

          Section
8.1      Delivery of Additional Documents.
Until the Obligations are repaid in full, (other than indemnity obligations and
similar obligations that survive the termination of this Agreement), Borrower,
at its expense, shall do all things and shall deliver all instruments requested
by the Administrative Agent to create, perfect, protect or continue any security
interest, mortgage or Lien granted or created under this Agreement or any of the
Security Documents. The Administrative Agent or any of the Lenders may examine,
inspect and copy or make extracts from all books and records of Borrower at any
time during regular business hours upon prior written notice to Borrower.
Borrower authorizes the Administrative Agent to execute alone any other
instruments that the Administrative Agent may require to establish, perfect,
protect or establish any Lien or security interest under this Agreement or any
of the Security Documents and further authorize the Administrative Agent to sign
Borrower’s name on any of those instruments. In accordance with Section
13.12, Borrower authorizes, during the continuance of an Event of Default,
the Administrative Agent to appoint any Person or Persons as the Administrative
Agent may designate as its agent and attorney in fact to endorse, for deposit
into the Project Account, the name of Borrower on any checks, notes, drafts or
other forms of payment or security that may come into the possession of the
Administrative Agent, any Lender or any of their respective Affiliates, to sign
Borrower’s name on invoices or bills of lading, drafts against customers,
notices of assignment, verifications and schedules and, generally, to do all
things necessary to carry out this Agreement and the Security Documents. The
powers granted in this Section 8.1 are coupled with an interest and are,
therefore, irrevocable. Neither the Administrative Agent, any Lender, any of
their respective Affiliates nor any agent or attorney in fact of any of them
will be liable to any Person for any act or omission, error in judgment or
mistake of law that is not intentional, willful or grossly negligent. Upon
payment and performance of all Obligations of Borrower (other than indemnity
obligations and 

72 




similar obligations that survive the termination of this
Agreement), to the Administrative Agent and the Lenders, this power of attorney
will become null and void. 

          Section
8.2      Payments by Lenders. If Borrower
fails to purchase or maintain insurance in accordance with this Agreement, or to
pay any tax, assessment, government charge or levy in accordance with this
Agreement, or in the event that any prohibited Lien, encumbrance or security
interest is not discharged in accordance with this Agreement, or in the event
that Borrower materially fails to perform or comply with any other covenant,
promise or Obligation under any Loan Document and such failure gives rise to a
Default that is continuing, Administrative Agent or Lenders may, but will not be
required to, perform, pay, satisfy, discharge or bond the same for the account
of Borrower, and all amounts paid by Administrative Agent or Lenders, including
reasonable attorneys’ fees and disbursements, will be deemed to be additional
Obligations owing by Borrower to the Administrative Agent and the Lenders under
this Agreement; provided, however, that Administrative Agent and
Lenders will not make any payments on behalf of Borrower without providing
Borrower prior written notice of at least three (3) Business Days. 

          Section
8.3      Possession. Upon the occurrence
and during the continuation of an Event of Default, the Administrative Agent may
(a) enter Borrower’s premises at any time, and (b) until it completes the
enforcement of their rights in the Equipment or other Collateral subject to its
Liens under the Security Documents and the sale or other disposition of any
property subject to those documents, take possession of those premises without
charge, rent or payment, or place custodians in control of any of the premises,
remain on and use the premises and any of Borrower’s Equipment and other
Collateral for the purpose of completing any work in progress, preparing any
Collateral for disposition or collecting any Collateral. 

          Section
8.4      Indemnification. 

                              (a)      BORROWER
WILL, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, INDEMNIFY THE
ADMINISTRATIVE AGENT, EACH OF THE LENDERS AND THEIR RESPECTIVE RELATED PARTIES
(collectively, the “Indemnified Parties”) AND HOLD EACH OF THEM HARMLESS FROM
AND AGAINST ANY AND ALL INJURIES, CLAIMS, DAMAGES, JUDGMENTS, LIABILITIES, COSTS
AND EXPENSES (INCLUDING, WITHOUT LIMITATION, REASONABLE FEES AND DISBURSEMENTS
OF COUNSEL), CHARGES AND ENCUMBRANCES WHICH MAY BE INCURRED BY OR ASSERTED
AGAINST ANY OF THE INDEMNIFIED PARTIES IN CONNECTION WITH OR ARISING OUT OF ANY
ASSERTION, DECLARATION OR DEFENSE OF LENDERS’ RIGHTS OR SECURITY INTERESTS UNDER
THE PROVISIONS OF THIS AGREEMENT, ANY SECURITY DOCUMENT OR ANY OTHER LOAN
DOCUMENT OR IN CONNECTION WITH: 

          (i)      THE
ACQUISITION OR OPERATION OF THE COLLATERAL; 

          (ii)      THE
REALIZATION, REPOSSESSION, SAFEGUARDING, INSURING OR OTHER PROTECTION OF THE
COLLATERAL WHILE AN EVENT OF DEFAULT IS CONTINUING; 

73 




     (iii)      THE
COLLECTING, PERFECTING OR PROTECTING OF LENDER’S LIENS AND SECURITY INTERESTS
UNDER THIS AGREEMENT AND THE OTHER SECURITY DOCUMENTS; AND 

     (iv)      ANY
INVESTIGATION, LITIGATION, OR PROCEEDING RELATED TO ANY PRESENT OR FUTURE
ACQUISITION OR PROPOSED ACQUISITION BY BORROWER. BORROWER WAIVES, TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAW, ALL RIGHTS IT MIGHT HAVE IN CONNECTION WITH
ANY SUIT OR ACTION AGAINST LENDER TO CLAIM SPECIAL, INDIRECT, CONSEQUENTIAL OR
PUNITIVE DAMAGES TO IT, ITS BUSINESSES OR PROSPECTS. BORROWER HAS CONSULTED WITH
ITS COUNSEL WITH RESPECT TO THE PROVISIONS OF THIS SECTION
8.4(a)(iv) AND UNDERSTANDS THAT IT IS TO BE INTERPRETED BROADLY AGAINST
BORROWER; 

PROVIDED THAT SUCH INDEMNITY SHALL NOT, AS TO ANY INDEMNIFIED
PARTY, BE AVAILABLE TO THE EXTENT THAT SUCH LOSSES, CLAIMS, DAMAGES, LIABILITIES
OR RELATED EXPENSES ARE DETERMINED BY A COURT OF COMPETENT JURISDICTION BY FINAL
AND NONAPPEALABLE JUDGMENT TO HAVE RESULTED FROM THE GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF SUCH INDEMNIFIED PARTY. FOR THE AVOIDANCE OF ALL DOUBT, TO THE
EXTENT THE PHRASE “RELATED EXPENSES,” WHEN USED IN THIS SECTION
8.4, REFERS TO EXPENSES THAT CONSTITUTE RELATED COSTS, SUCH EXPENSES WILL BE
DEEMED TO BE LIMITED TO SUCH EXPENSES OF THE ADMINISTRATIVE AGENT (BUT NOT THE
LENDERS) IN ACCORDANCE WITH THE DEFINITION OF “RELATED COSTS” IN
SECTION 1.1 ABOVE. 

                         (b)      BORROWER
SHALL INDEMNIFY THE ADMINISTRATIVE AGENT AND EACH LENDER, AND EACH RELATED PARTY
OF ANY OF THE FOREGOING PERSONS (EACH SUCH PERSON BEING CALLED AN
“INDEMNITEE”) AGAINST, AND HOLD EACH INDEMNITEE HARMLESS FROM, ANY AND
ALL LOSSES, CLAIMS, DAMAGES, LIABILITIES AND RELATED EXPENSES, INCLUDING THE
REASONABLE FEES, CHARGES AND DISBURSEMENTS OF ANY COUNSEL FOR ANY INDEMNITEE,
INCURRED BY OR ASSERTED AGAINST ANY INDEMNITEE ARISING OUT OF, IN CONNECTION
WITH, OR AS A RESULT OF (i) THE EXECUTION OR DELIVERY OF THIS AGREEMENT OR ANY
OTHER LOAN DOCUMENT OR ANY AGREEMENT OR INSTRUMENT CONTEMPLATED HEREBY OR
THEREBY, THE PERFORMANCE BY THE PARTIES HERETO OR THE PARTIES TO ANY OTHER LOAN
DOCUMENT OF THEIR RESPECTIVE OBLIGATIONS HEREUNDER OR THEREUNDER OR THE
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREBY OR BY ANY OTHER LOAN
DOCUMENT, (ii) THE FAILURE OF BORROWER OR ANY OTHER PERSON TO COMPLY WITH THE
TERMS OF ANY LOAN DOCUMENT, INCLUDING THIS AGREEMENT, OR WITH ANY GOVERNMENTAL
REQUIREMENT, (iii) ANY INACCURACY OF ANY REPRESENTATION OR ANY BREACH OF ANY
WARRANTY OR COVENANT OF BORROWER SET FORTH IN ANY OF THE LOAN DOCUMENTS OR ANY
INSTRUMENTS, DOCUMENTS OR CERTIFICATIONS DELIVERED IN CONNECTION THEREWITH, (iv)
ANY LOAN OR ADVANCE OR THE USE OF THE 

74 




PROCEEDS THEREFROM, (v) THE OPERATIONS OF THE BUSINESS OF
BORROWER AND ITS AFFILIATES BY BORROWER AND ITS AFFILIATES, (vi) ANY ASSERTION
THAT THE LENDERS WERE NOT ENTITLED TO RECEIVE THE PROCEEDS RECEIVED PURSUANT TO
THE SECURITY INSTRUMENTS (AFTER GIVING EFFECT TO THE PERMITTED ENCUMBRANCES),
(vii) ANY ENVIRONMENTAL LAW APPLICABLE TO BORROWER OR ANY AFFILIATE OR ANY OF
THEIR PROPERTIES, INCLUDING WITHOUT LIMITATION, THE PRESENCE, GENERATION,
STORAGE, RELEASE, THREATENED RELEASE, USE, TRANSPORT, DISPOSAL, ARRANGEMENT OF
DISPOSAL OR TREATMENT OF OIL, OIL AND GAS WASTES, SOLID WASTES OR HAZARDOUS
SUBSTANCES ON ANY OF THEIR PROPERTIES, (viii) THE BREACH OR NON-COMPLIANCE BY
BORROWER OR ANY AFFILIATE WITH ANY ENVIRONMENTAL LAW APPLICABLE TO BORROWER OR
ANY AFFILIATE, (ix) THE PAST OWNERSHIP BY BORROWER OR ANY AFFILIATE OF ANY OF
THEIR PROPERTIES OR PAST ACTIVITY ON ANY OF THEIR PROPERTIES WHICH, THOUGH
LAWFUL AND FULLY PERMISSIBLE AT THE TIME, COULD RESULT IN PRESENT LIABILITY, (x)
THE PRESENCE, USE, RELEASE, STORAGE, TREATMENT, DISPOSAL, GENERATION, THREATENED
RELEASE, TRANSPORT, ARRANGEMENT FOR TRANSPORT OR ARRANGEMENT FOR DISPOSAL OF
OIL, OIL AND GAS WASTES, SOLID WASTES OR HAZARDOUS SUBSTANCES ON OR AT ANY OF
THE PROPERTIES OWNED OR OPERATED BY BORROWER OR ANY AFFILIATE OR ANY ACTUAL OR
ALLEGED PRESENCE OR RELEASE OF HAZARDOUS MATERIALS ON OR FROM ANY PROPERTY OWNED
OR OPERATED BY BORROWER OR ANY OF ITS AFFILIATES, (xi) ANY ENVIRONMENTAL
LIABILITY RELATED IN ANY WAY TO BORROWER OR ANY OF ITS AFFILIATES, (xii) ANY
OTHER ENVIRONMENTAL, HEALTH OR SAFETY CONDITION IN CONNECTION WITH THE LOAN
DOCUMENTS, OR (xiii) ANY ACTUAL OR PROSPECTIVE CLAIM, LITIGATION,
INVESTIGATION OR PROCEEDING RELATING TO ANY OF THE FOREGOING, WHETHER BASED ON
CONTRACT, TORT OR ANY OTHER THEORY AND REGARDLESS OF WHETHER ANY INDEMNITEE IS A
PARTY THERETO, AND SUCH INDEMNITY SHALL EXTEND TO EACH INDEMNITEE
NOTWITHSTANDING THE SOLE OR CONCURRENT NEGLIGENCE OF EVERY KIND OR CHARACTER
WHATSOEVER, WHETHER ACTIVE OR PASSIVE, WHETHER AN AFFIRMATIVE ACT OR AN
OMISSION, INCLUDING WITHOUT LIMITATION, ALL TYPES OF NEGLIGENT CONDUCT
IDENTIFIED IN THE RESTATEMENT (SECOND) OF TORTS OF ONE OR MORE OF THE
INDEMNITEES OR BY REASON OF STRICT LIABILITY IMPOSED WITHOUT FAULT ON ANY ONE OR
MORE OF THE INDEMNITEES; PROVIDED THAT SUCH INDEMNITY SHALL NOT, AS TO ANY
INDEMNITEE, BE AVAILABLE TO THE EXTENT THAT SUCH LOSSES, CLAIMS, DAMAGES,
LIABILITIES OR RELATED EXPENSES ARE DETERMINED BY A COURT OF COMPETENT
JURISDICTION BY FINAL AND NONAPPEALABLE JUDGMENT TO HAVE RESULTED FROM THE GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNITEE. AS USED IN THIS SECTION THE
TERM “LENDERS” SHALL REFER NOT ONLY TO THE PERSONS DESIGNATED AS SUCH IN
SECTION 1.1 BUT ALSO TO EACH DIRECTOR, OFFICER, AGENT, ATTORNEY,
EMPLOYEE, REPRESENTATIVE AND AFFILIATE OF SUCH PERSONS. 

                         (c)      All
amounts due under this Section 8.4 shall be payable not later than ten
(10) days after written demand therefor. 

75 




          Section
8.5      Removal and Appointment of Operator.
The Administrative Agent will, in its reasonable discretion, have the right to
approve or disapprove any action taken by Borrower to appoint, remove or replace
the Operator of any of the Properties. 

ARTICLE IX 

  CLOSING; CONDITIONS PRECEDENT TO CLOSING

          Section
9.1      Closing. Subject to the conditions
stated in this Agreement, Closing of the Loan will occur at a mutually agreeable
time on or before July 30, 2008. The dates on which the Loan Documents are
executed and each of the conditions in Section 9.2 are satisfied will be
known as the “Closing Date.” Closing will occur at the offices of
Greenberg Traurig, LLP, 1000 Louisiana Street, 17th Floor, Houston, Texas 77002,
at 10:00 a.m. on the Closing Date, or at any other place and time as Borrower
and Administrative Agents may agree in writing or electronic mail. 

          Section
9.2      Conditions to Making the Initial
Advance. As conditions to the making of the initial Advance in the amount of
Five Million Three Hundred Thousand and No/100 Dollars ($5,300,000.00) under the
Loan: 

                         (a)     
Borrower will execute and deliver to the Administrative Agent and the Lenders,
respectively, or their designee each of the Loan Documents to which Borrower is
a party, each in form and substance satisfactory to Administrative Agent; 

                         (b)     
Borrower will cause each Person designated by the Administrative Agent to
execute and deliver to the Administrative Agent the Subordination Agreements;


                         (c)      Borrower
will have obtained all permits, licenses and bonds required to own and operate
the Properties under any applicable Governmental Requirements, and such permits,
licenses and bonds are set forth in Schedule 6.19 attached hereto; 

                         (d)      the
Administrative Agent is satisfied, in its sole and absolute discretion, with all
business, financial, legal, title, engineering and environmental due diligence
with respect to Borrower and the Properties; 

                         (e)     
Borrower will confirm, to the satisfaction of the Administrative Agent, the
location premium and transport costs for Hydrocarbons produced by the Wells
within the Properties; 

                         (f)      Borrower
will deliver to the Administrative Agent its pro forma financial statement and
balance sheet prepared in accordance with GAAP, except for the omission of the
notes required by GAAP, and subject to the assumptions stated and normal
“year end adjustments” and certified as of the Closing Date by
Borrower’s Authorized Officer as accurately showing the financial position of
Borrower after giving effect to this Agreement (including the payment of all
fees and expenses to be paid or payable in connection with this Agreement and
the initial Advance to be requested by Borrower under the Loan, if such an
Advance is to be requested at Closing); in addition, Borrower will have no
contingent liabilities, liabilities for taxes, unusual forward or long term
commitments or unrealized or unanticipated losses from any unfavorable
commitments that are not disclosed in the financial statements; 

76 




                         (g)      An
environmental consultant satisfactory to the Administrative Agent will inspect
the Properties and deliver to the Administrative Agent an environmental site
assessment satisfactory in form and substance to the Administrative Agent; 

                         (h)      Borrower
will deliver to the Administrative Agent (i) title opinions or other
evidence of title relating to an agreed upon percentage of the Properties
(current to the interests owned by Borrower and the security interests and Liens
being granted under the Mortgage or otherwise satisfactory in form and substance
to Lender) showing Defensible Title to the Properties vested in Borrower’s
Seller, Hanson Energy, subject only to the Permitted Encumbrances and otherwise
satisfactory in form and substance to Lender; (ii) a map indicating the
location of each Lease comprising the Properties and identifying each PDP well,
each PDNP well and each PUD location on the Properties; and (iii) a list
of all Leases comprising the Properties together with the expiration dates of
each Lease and a summary of any affirmative drilling obligations or other
mandatory capital expenditures required to maintain each Lease in force and
effect; 

                         (i)     
any necessary Governmental Authority will have approved in writing the transfer
of the Properties to Borrower, and that written approval will be satisfactory in
form and substance to the Administrative Agent in its sole and absolute
discretion; 

                         (j)     
Borrower will deliver to the Administrative Agent the Basic Documents and all
other documents and instruments as the Administrative Agent may reasonably
request, all of which will be satisfactory, in form and substance, to the
Administrative Agent; 

                         (k)     
Borrower will deliver to the Administrative Agent satisfactory legal opinions,
including usury opinions, in form and substance satisfactory to Administrative
Agent in its sole and absolute discretion; 

                         (l)      Borrower
will deliver to the Administrative Agent or cause to be delivered to the
Administrative Agent: 

          (i)      a
copy of resolutions, in form and substance satisfactory to the Administrative
Agent, authorizing (1) the execution, delivery and performance by Borrower of
the Loan Documents to which it is or will be a party, (2) the borrowings
contemplated by this Agreement, (3) the granting of the Liens contemplated by
the Mortgages and the other Security Documents, certified as true and correct by
an officer of Borrower as of the Closing Date and certifying that the
resolutions have not been amended, modified, revoked or rescinded as of the
Closing Date; 

          (ii)      a
certificate of the Secretary or other Authorized Officer of Borrower dated the
Closing Date, certifying the Authorized Officer’s signature on behalf of
Borrower executing the Loan Documents to which such Borrower is a party and any
certificate or other documents to be delivered in connection with any of the
Loan Documents; and 

          (iii)     
(1) a copy of the Charter Documents of Borrower, certified as of a date not more
than thirty (30) Business Days prior to the Closing Date by the Nevada Secretary
of State (2) a certificate as of a date not more than thirty (30) Business Days


77 




prior to the Closing Date from the Nevada Secretary of State as
to the existence and good standing of Borrower as corporation, and (3) a
certificate dated the Closing Date from an Authorized Officer of Borrower to the
effect that the documents delivered pursuant to items (1)–(2) are true and
correct copies and, with regard to item (1) as on file with the Nevada Secretary
of State, no action has been taken to amend, modify or repeal that document and
it remains in full force and effect in that same form on the Closing Date. 

                         (m)      the
Administrative Agent will have reviewed and found acceptable Borrower’s
accounting and business systems (including “back-office” and
administrative functions); 

                         (n)      Borrower
will have identified to the Administrative Agent independent public accountants
Borrower will retain, which independent public accountants shall be satisfactory
to Borrower and the Administrative Agent; 

                         (o)      Borrower
will execute and deliver to MBL or its designated Affiliate the Swap Agreement;


                         (p)      Borrower
will deliver to the Administrative Agent copies of all insurance certificates
required under this Agreement listing the Administrative Agent as a loss payee
or additional insured or as otherwise required by Administrative Agent, each
certified as true and correct by an Authorized Officer of Borrower and
acceptable to the Administrative Agent in its sole and absolute discretion
(provided, however, Borrower shall provide copies of any such insurance policy
upon the Administrative Agent’s request); 

                         (q)      Borrower
has provided any other information required by Section 326 of the USA PATRIOT
Act or deemed necessary in the opinion of each Lender to enable such Lender to
verify the identities of Borrower as required by Section 326 of the USA PATRIOT
Act; 

                         (r)      No
Material Adverse Effect has occurred; 

                         (s)      Except
as disclosed in this Agreement, there are no past due bills for improvements or
services to the Properties that could give rise to mechanic’s or materialmen’s
Liens or any other similar encumbrance arising by operation of applicable law
that are not subject to a Subordination Agreement in favor of Lender; 

                         (t)     
the Administrative Agent is satisfied with the management of Borrower; 

                         (u)      The
representations in each of the Loan Documents of Borrower and each other Person
party thereto are true, complete and correct in all material respects; 

                         (v)      the
Administrative Agent is satisfied, in its sole and absolute discretion, with the
results of its due diligence examination of Borrower and the Properties,
including Borrower’s proposed development of the Properties, satisfactory
information regarding existing Crude Oil and Natural Gas sales, and all aspects
of Borrower’s existing and contemplated Crude Oil and Natural Gas marketing
activities; 

78 




                         (w)      No
suit or other proceeding is pending or threatened before any Governmental
Authority seeking to restrain, enjoin or prohibit or declare illegal, or seeking
damages from Borrower in connection with the transactions contemplated in this
Agreement or alleging the breach of any material contract; 

                         (x)      Borrower
has reimbursed, or will concurrently with the first Advance reimburse,
Administrative Agent and Lenders for all Related Costs for which invoices have
been presented; 

                         (y)     
Borrower has paid the fees set forth in Section 2.4; 

                         (z)     
Borrower will have delivered to the Administrative Agent such financial
statements as the Administrative Agent may request and such financial statements
will be acceptable to the Administrative Agent in its sole and absolute
discretion; 

                         (aa)     
Borrower will have on hand capital sufficient to conduct the operations
contemplated by this Agreement as determined by the Administrative Agent in its
sole and absolute discretion; 

                         (bb)      All
Operating Agreements (inclusive of all COPAS provisions) with respect to the
Properties will be in form and substance satisfactory to the Administrative
Agent in its sole and absolute discretion; 

                         (cc)      The
transactions contemplated by this Agreement are not prohibited by law or
regulations applicable to Borrower, Administrative Agent or any Lender,
including, but not limited to, the USA PATRIOT Act; 

                         (dd)      Borrower
has received, read and executed, as applicable, the Client Registration Form
(Corporate Account) and Terms and Conditions of Investment Business of MBL
attached hereto as Exhibit J; 

                         (ee)      Borrower
has delivered to the Administrative Agent releases of all existing Liens (except
for Liens that are Permitted Encumbrances) on the Properties, each of which will
be satisfactory to the Administrative Agent; and 

                         (ff)      No
amendments to the PSA have been made other than amendments which have been
previously approved in writing by Administrative Agent, and all conditions
precedent to closing pursuant to the PSA have been fully satisfied. 

          Section
9.3      Additional Conditions Precedent.
In addition to the conditions set forth in Article II and Section
9.2 above, the following additional conditions apply to the making of each
subsequent Advance under the Loan: 

                         (a)      Borrower
will deliver to the Administrative Agent an Advance Request substantially in the
form of Exhibit C; 

                         (b)      if
applicable, any necessary Governmental Authority will have consented in writing
to the granting of the Liens and other rights contemplated by the Mortgages, and
that 

79 




written consent will be reasonably satisfactory in form and
substance to the Administrative Agent; 

                         (c)      Upon
the Administrative Agent’s reasonable request and to the extent not previously
provided, Borrower will obtain and deliver to the Administrative Agent any other
documents, including Lien waivers, additional Subordination Agreements,
certificates, consents and other approvals required from third parties, all in
form and substance acceptable to the Administrative Agent, necessary to the
preservation of the Administrative Agent’s first-priority Lien on all of the
Borrower’s assets; 

                         (d)      For
each Well for which Borrower is the Operator, Borrower and Operator will execute
and deliver to the Administrative Agent the Operating Agreements for each Well
that is the subject of any pending Advance, and each of those agreements
(including the COPAS provisions) will be in form and substance reasonably
satisfactory to the Administrative Agent; 

                         (e)     
To the extent not previously delivered to the Administrative Agent, including in
connection with any additional Properties acquired by Borrower after the Closing
Date, Borrower will deliver to the Administrative Agent such documents as the
Administrative Agent may reasonably request, including supplemental or
additional title opinions, permits or consents required by any Governmental
Authority; 

                         (f)      To
the extent not previously delivered to the Administrative Agent or its designee
and acknowledged in writing by the Administrative Agent, Borrower will have
provided evidence satisfactory to the Administrative Agent that all seismic and
other geological, geophysical, engineering and well data relating to the
Properties and owned by Borrower and has been or will be assigned to Borrower
free of any encumbrance except for existing third party agreements; 

                         (g)      To
the extent not previously delivered to the Administrative Agent, Borrower will
deliver to the Administrative Agent an opinion or opinions of counsel to
Borrower covering any Loan Document executed and delivered to the Administrative
Agent after the Closing Date, and each such opinion will be satisfactory to the
Administrative Agent and its counsel and will provide that the Administrative
Agent, each of the Lenders and their respective lenders or assignees will be
entitled to rely upon it; 

                         (h)      To
the extent not previously delivered to Administrative Agent, Mortgages on any
Properties of Borrower that constitute real property or, to the extent the
Properties are comprised of Leases that are not deemed to be real property by
the applicable jurisdiction, appropriate documentation granting Lender a
security interest in all rights of Borrower to such Leases; 

                         (i)      At
the time of and immediately after giving effect to such Advance, no Default
shall have occurred and be continuing; 

                         (j)      At
the time of and immediately after giving effect to such Advance, no Material
Adverse Effect shall have occurred; 

80 




                         (k)      The
representations and warranties of Borrower set forth in this Agreement and in
the other Loan Documents shall be true and correct in all material respects on
and as of the date of such borrowing, except to the extent any such
representations and warranties are expressly limited to an earlier date, in
which case, on and as of the date of such borrowing, such representations and
warranties shall continue to be true and correct in all material respects as of
such specified earlier date; 

                         (l)      The
making of such Advances would not conflict with, or cause Administrative Agent
or any Lender to violate or exceed, any applicable Governmental Requirement, and
no change in law shall have occurred, and no litigation shall be pending or
threatened, which does or, seeks to, enjoin, prohibit or restrain, the making or
repayment of any Advance or any participations therein or the consummation of
the transactions contemplated by this Agreement or any other Loan Document; 

                         (m)      Borrower
will deliver to the Administrative Agent a certificate from an authorized
officer of Borrower representing and warranting that the matters specified in
Section 9.3(i)-(l) are true and correct as of the date of
the certification; 

                         (n)      Borrower
has implemented a commodity price risk management program as required by
Section 6.20 above; and 

                         (o)      To
the extent the scope of insurance required by Section 6.9 above has
changed since the Closing Date as a result of the approval of a revised
Development Plan by the Administrative Agent, the Administrative Agent has
approved Borrower’s insurance coverage and determined that it is satisfactory
for Borrower’s operations as contemplated by the then applicable Development
Plan. 

ARTICLE X 

  EVENTS OF DEFAULT

          Section
10.1      Events of Default. The occurrence
and continuance of any of the following at any time during the term of this
Agreement will be an “Event of Default” hereunder: 

                         (a)     
Borrower shall default in the payment when due of any amount payable by it under
this Agreement, the Promissory Notes or any Security Document and such default
shall continue for more than two (2) Business Days after the date due; or 

                         (b)     
Borrower or any other Obligor fails to comply with any material term, condition,
or covenant of this Agreement (other than a payment Obligation under Section
10.1(a) or Section 6.21), the Promissory Note, any Security Document,
the Subordination Agreement or any other Loan Document, whether or not related
to any payment Obligation and, with respect to any Obligor only, such failure
shall continue unremedied for a period of thirty (30) days after Borrower
becomes aware of its occurrence, provided, however, if Borrower promptly
initiates and diligently pursues efforts to remedy such default, Borrower shall
have a period of ninety (90) days after Borrower becomes aware of such
occurrence to cure such default; or 

                         (c)      Borrower
(i) executes an assignment for the benefit of its creditors, (ii)
becomes or is adjudicated bankrupt or insolvent, (iii) admits in writing
its inability to pay its 

81 




debts generally as they become due, (iv) applies for or
consents to the appointment of a conservator, receiver, trustee, or liquidator
of Borrower or of all or any substantial part of its assets, (v) files a
voluntary petition seeking reorganization or an arrangement with creditors, or
to take advantage of or seek any other relief under any Debtor Relief Laws,
(vi) files an answer admitting the material allegations of or consenting
to, or defaults in, a petition filed against it in any proceeding under any
Debtor Relief Laws, or (vii) institutes or voluntarily becomes a party to
any other judicial proceedings intended to effect a discharge of its debts, in
whole or in part, or seeking to postpone the maturity or the collection of any
of its debts or to suspend any of the rights of the Administrative Agent, any of
the Lenders or any of their respective Affiliates under any of the Loan
Documents; or 

                         (d)      an
order, judgment, or decree is entered by any court of competent jurisdiction
approving a petition seeking reorganization of Borrower or appointing a
conservator, receiver, trustee, or liquidator of Borrower, or of all or any
substantial part of its assets, and the order, judgment, or decree is not
permanently stayed or reversed within sixty (60) days after its entry, or a
petition is filed against Borrower seeking reorganization, an arrangement with
creditors, or any other relief under any Debtor Relief Laws, and the petition is
not discharged within ninety (90) days after its filing; or 

                         (e)      if
any statement or representation of the Borrower or any other party (other than
the Administrative Agent or any Lender) contained in this Agreement, any
Security Document, any other Loan Document, any financial statement or any
certificate delivered by Borrower to the Administrative Agent or any of the
Lenders shall be discovered to have been materially false when made or deemed
made; or 

                         (f)      if
any federal tax Lien or any other Liens totaling One Hundred Thousand Dollars
($100,000) or more are filed of record against Borrower, Operator or the
Properties and not bonded or discharged within thirty (30) days after Borrower
receives actual or constructive notice of its filing unless Borrower promptly
initiates and diligently pursues efforts (including legal proceedings) in good
faith to discharge such Liens; provided that in no event will the period
permitted for the bonding or discharge of such federal tax Lien(s) exceed sixty
(60) days; or 

                         (g)     
if a judgment (i) for more than One Hundred Thousand Dollars ($100,000)
or (ii) for any amount if the execution and enforcement of such judgment
could reasonably be expected to adversely affect Borrower’s or Operator’s
ability to operate the Properties is entered against Borrower or Operator and
not appealed and bonded or stayed, vacated, paid, or discharged within thirty
(30) days of its entry, except a judgment where the claim is fully covered by
insurance and the insurance company has accepted liability for the claim or for
which Borrower has adequate reserves under GAAP; or 

                         (h)      unless
Borrower provides written notice to the Administrative Agent (prior to the date
on which such Debt becomes due) detailing to the satisfaction of the
Administrative Agent the basis upon which Borrower intends to dispute the
obligation, Borrower fails to pay any Debt in excess of One Hundred Thousand
Dollars ($100,000) (other than Debt under this Agreement) or any related
interest or premium, when due (whether at scheduled maturity or by acceleration,
demand or otherwise) and the failure continues after the applicable grace
period, if any, specified in the agreement or instrument relating to the Debt,
or any other 

82 




event occurs and continues after the applicable grace period,
if any, specified in the applicable agreement or instrument, if the effect of
the default or event is to accelerate or to permit the acceleration of the
maturity of the Debt or permit the Debt to be declared to be due and payable
prior to the stated maturity; or 

                         (i)      this
Agreement, the Promissory Notes, any Security Document, or any other Loan
Document ceases to be in full force and effect (except in accordance with its
terms) or is declared null and void or the validity or enforceability is
contested or challenged by Borrower, any Affiliate of Borrower or any of their
respective members, partners or shareholders; (ii) Borrower deny that
they have any further liability or obligation under this Agreement, the
Promissory Note or any of the Security Documents; or (iii) any of the
Liens granted to the Administrative Agent of any of the Lenders under the
Security Documents cease to be valid or perfected or cease to have the priority
required hereby or under the Security Documents; or 

                         (j)      Borrower
fails to provide satisfactory evidence to Lender, within thirty (30) days of
Closing, that any Lien (other than Permitted Encumbrances) against the
Properties in favor of a third-party has been released or subordinated to
Lender; or 

                         (k)      Borrower
or Operator fail to comply with any Governmental Requirements pertaining in any
way to Borrower, the Properties, the Hydrocarbons or any of the other Collateral
and such failure could reasonably be expected to have a Material Adverse Effect;
or 

                         (l)      any
Operator is removed or withdraws and the replacement Operator is not acceptable
to the Administrative Agent in the Administrative Agent’s reasonable discretion;
or 

                         (m)     
except in connection with such Borrower’s acquisition of an additional Working
Interest in the Properties pursuant to which such Borrower also realizes a
proportionately higher Net Revenue Interest in the Properties (and such Net
Revenue Interest is not subject to reduction at any time following the closing
of such acquisition), any Borrower’s Working Interest is increased or Net
Revenue Interest is decreased from those set forth in Exhibit A
without the prior written consent of the Administrative Agent; or 

                         (n)     
Borrower causes or suffers to exist a default of any material obligation of
Borrower under any Hedging Agreement that continues beyond the applicable cure
period and such default could reasonably be expected to have a Material Adverse
Effect; or 

                         (o)      Borrower
modifies or amends any of its Charter Documents in any material manner without
the Administrative Agent’s prior written consent; or 

                         (p)      a
Change of Control occurs without the Administrative Agent’s prior written
consent; or 

                         (q)     
a Material Adverse Effect occurs; or 

                         (r)      provided,
however, that the events described in any of Section 10.1(b), (e),
(h), (i), (j), (k) and (l) will constitute an
Event of Default only if the event described is not 

83 




remedied by Borrower within thirty (30) days after the earlier
of (i) any officer of Borrower (or, in the case of any other Obligor, any
officer of that obligor) becoming aware of the occurrence of the event and
(ii) Borrower’s receipt of a notice from the Administrative Agent on
behalf of the Lenders of the occurrence of the event. 

ARTICLE XI 

  REMEDIES OF LENDERS

          Section
11.1      Remedies. Upon the occurrence of any
Event of Default other than under Section 10.1(c) or 10.1(d), the
Administrative Agent shall, by written notice to Borrower, take either or both
of the following actions, at the same or different times: (i) terminate
the commitments and thereupon the commitments shall terminate immediately and
(ii) declare the Promissory Notes and the Loan due and payable in whole
(or in part, in which case any principal not so declared to be due and payable
may thereafter be declared to be due and payable), and thereupon the principal
of the Loan so declared to be due and payable, together with accrued interest
thereon and all fees and other obligations of Borrower accrued hereunder and
under the Promissory Notes and the other Loan Documents, shall become due and
payable immediately, without presentment, demand, protest, notice of intent to
accelerate, notice of acceleration or other notice of any kind, all of which are
hereby waived by Borrower. Upon the occurrence of an Event of Default described
in Section 10.1(c) or Section 10.1(d), the commitments to make
additional Advances shall automatically terminate and the Promissory Notes and
the principal of the Loan then outstanding, together with accrued interest
thereon and all fees and the other obligations of Borrower accrued hereunder and
under the Promissory Notes and the other Loan Documents, shall automatically
become due and payable, without presentment, demand, protest or other notice of
any kind, all of which are hereby waived by Borrower. Upon a termination of the
Lenders’ commitments following an Event of Default, the Administrative Agent (on
behalf of each of the Lenders) will have, in addition to all other rights
arising under any of the Loan Documents or by operation of law or otherwise
(which rights shall be cumulative), all of the rights and remedies of a secured
party under the Uniform Commercial Code and will have the right to enter upon
any premises where the Collateral is kept and peacefully retake possession. 

          Section
11.2      Collateral. Neither the
Administrative Agent nor any of the Lenders will have any obligation to preserve
rights to any Collateral against prior parties or to proceed first against any
Collateral or to marshal any Collateral of any kind for the benefit of any other
creditor of Borrower or any other Person. Borrower grants to the Administrative
Agent and the Lenders a license or other right to use, at any time that after
the occurrence and during the continuance of an Event of Default exists, without
charge, Borrower’s labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks and advertising matter, or any property of a
similar nature related to the Collateral and necessary or convenient in
connection with the Administrative Agent completing production of, advertising
for sale and selling any Collateral, and Borrower’s rights under all licenses
and any franchise, sales or distribution agreements will inure to the
Administrative Agent’s benefit (for the benefit of each of the Lenders). 

          Section
11.3      Set-Off Rights. Upon the
occurrence and during the continuation of an Event of Default, Lenders or the
Administrative Agent on behalf of the Lenders will have the right, at any time
and from time to time, to set off and apply against the Obligations, in any 

84 




manner Lenders may determine, any and all deposits (general or
special, time or demand, provisional or final) or other amounts at any time
credited by or owing from Lenders or any depositary to Borrower whether or not
the Obligations are then due; provided, however, that this
sentence will not apply to any amounts owing to third party Working Interest and
Royalty Interest previously identified in writing to Lenders. Lenders will
provide notice to Borrower not later than ten (10) days following the
application of any funds under this Section 11.3. As further security for
the Obligations, Borrower grants to Lenders a security interest in and Lien on
all money, instruments, and other property of Borrower now or at any time held
by Lenders, including property held in safekeeping. In addition to Lenders’
right of set off and as further security for the Obligations, Borrower grants to
Lenders a security interest in and Lien on all deposits (general or special,
time or demand, provisional or final) and other accounts of Borrower now or at
any time on deposit with or held by Lenders or any depositary together with all
other amounts at any time credited by or owing from Lenders or any depositary to
Borrower. The rights and remedies of Lenders under this Section 11.3 are
in addition to other rights and remedies (including other rights of set off)
that Lenders may have. 

          Section
11.4      Rights Under Operating
Agreements. Upon the occurrence and during the continuation of an Event of
Default and after notice to Borrower of its intent to exercise the same, the
Administrative Agent will have the right to exercise Borrower’s rights under any
Operating Agreement or any other Basic Document. 

ARTICLE XII 

  ADMINISTRATIVE AGENT

          Section
12.1      Appointment and Authorization of
Administrative Agent. Subject to Section 12.19 below, each Lender
hereby irrevocably appoints, designates and authorizes the Administrative Agent
to act as its agent under this Agreement and Loan Documents and to take such
action on its behalf under the provisions of this Agreement and each other Loan
Document and to exercise such powers and perform such duties as are expressly
delegated to it by the terms of this Agreement, or any other Loan Document,
together with such powers as are reasonably incidental thereto. Notwithstanding
any provision to the contrary contained elsewhere herein or in any Loan
Document, the Administrative Agent shall not have any duties or
responsibilities, except those expressly set out herein, nor shall the
Administrative Agent have or be deemed to have any fiduciary relationship with
any Lender or participant, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Agreement, or any other Loan Document or otherwise exist against the
Administrative Agent. Without limiting the generality of the foregoing sentence,
the use of the term “Administrative Agent” herein and in the Loan
Documents with reference to the Administrative Agent is not intended to connote
any fiduciary or other implied (or express) obligations arising under agency
doctrine of any applicable law. Instead, such term is used merely as a matter of
market custom, and is intended to create or reflect only an Administrative
relationship between independent contracting parties. 

          Section
12.2      Delegation of Duties. The
Administrative Agent may execute any of its duties under this Agreement, or any
other Loan Document by or through agents, employees or attorneys-in-fact and
shall be entitled to advice of counsel and other consultants or experts
concerning all matters pertaining to such duties. The Administrative Agent shall
not be 

85 




responsible for the negligence or misconduct of any agent or
attorney-in-fact that it selects in the absence of gross negligence or willful
misconduct on the part of the Administrative Agent. 

          Section
12.3      Liability of Administrative Agent. No
Administrative Agent-Related Person shall (a) be liable for any action taken or
omitted to be taken by any of them under or in connection with this Agreement,
or any other Loan Document or the transactions contemplated hereby (except for
its own gross negligence or willful misconduct in connection with its duties
expressly set out herein), or (b) be responsible in any manner to any Lender or
participant for any recital, statement, representation or warranty made by
Borrower or any officer thereof, contained in this Agreement or in any other
Loan Document, or in any certificate, report, statement or other document
referred to or provided for in, or received by the Administrative Agent under or
in connection with, this Agreement, or any other Loan Document, or the validity,
effectiveness, genuineness, enforceability or sufficiency of this Agreement, or
any other Loan Document, or for any failure of Borrower or any other party to
any Loan Document to perform its obligations hereunder or thereunder. No
Administrative Agent-Related Person shall be under any obligation to any Lender
or participant to ascertain or to inquire as to the observance or performance of
any of the agreements contained in, or conditions of, this Agreement, or any
other Loan Document, or to inspect the properties, books or records of Borrower
or any Affiliate thereof. 

     Section
12.4      Reliance by Administrative Agent.


                         (a)     
The Administrative Agent shall be entitled to rely, and shall be fully protected
in relying, upon any writing, communication, signature, resolution,
representation, notice, consent, certificate, affidavit, letter, telegram,
facsimile, telex or telephone message, electronic mail message, statement or
other document or conversation believed by it to be genuine and correct and to
have been signed, sent or made by the proper Person or Persons, and upon advice
and statements of legal counsel (including counsel to Borrower), independent
accountants and other experts selected by the Administrative Agent. The
Administrative Agent shall be fully justified in failing or refusing to take any
action under any Loan Document unless it shall first receive such advice or
concurrence of the Required Lenders as it deems appropriate and, if it so
requests, it shall first be indemnified to its satisfaction by the Lenders
against any and all liability and expense which may be incurred by it by reason
of taking or continuing to take any such action. The Administrative Agent shall
in all cases be fully protected in acting, or in refraining from acting, under
this Agreement, or any other Loan Document in accordance with a request or
consent of the Required Lenders (or such greater number of Lenders as may be
expressly required hereby in any instance) and such request and any action taken
or failure to act pursuant thereto shall be binding upon all the Lenders. 

                         (b)     
For purposes of determining compliance with the conditions specified in
Article IX, each Lender shall, where applicable, be deemed to have
consented to, approved or accepted or to be satisfied with, each document or
other matter required thereunder to be consented to or approved by or acceptable
or satisfactory to a Lender unless the Administrative Agent shall have received
notice from such Lender prior to the Closing Date or Advance date, as
applicable, specifying its objection thereto. 

          Section
12.5      Notice of Default. The
Administrative Agent shall not be deemed to have knowledge or notice of the
occurrence of any Default or Event of Default, except with respect to 

86 




defaults in the payment of principal, interest and fees
required to be paid to the Administrative Agent for the account of the Lenders,
unless the Administrative Agent shall have received written notice from a Lender
or the Borrower referring to the Agreement, describing such Default or Event of
Default and stating that such notice is a “notice of default.” The
Administrative Agent will notify the Lenders of its receipt of any such notice.
The Administrative Agent shall take such action, or refrain from taking such
action, with respect to such Default or Event of Default as it shall deem
advisable or in the best interest of the Lenders. 

          Section
12.6      Credit Decision; Disclosure of Information
by Administrative Agent. Each Lender acknowledges that no Administrative
Agent-Related Person has made any representation or warranty to it, and that no
act by the Administrative Agent hereafter taken, including any consent to and
acceptance of any assignment or review of the affairs of Borrower or any
Affiliate thereof, shall be deemed to constitute any representation or warranty
by any Administrative Agent-Related Person to any Lender as to any matter,
including whether Administrative Agent-Related Persons have disclosed material
information in their possession. Each Lender represents to the Administrative
Agent that it has, independently and without reliance upon any Administrative
Agent-Related Person and based on such documents and information as it has
deemed appropriate, made its own appraisal of and investigation into the
business, prospects, operations, property, financial and other condition and
creditworthiness of the Borrower and its Affiliates, and all applicable bank or
other regulatory laws relating to the transactions contemplated hereby, and made
its own decision to enter into this Agreement and to extend credit to the
Borrower under the Agreement. Each Lender also represents that it will,
independently and without reliance upon any Administrative Agent-Related Person
and based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit analysis, appraisals and decisions in
taking or not taking action under this Agreement and the other Loan Documents,
and to make such investigations as it deems necessary to inform itself as to the
business, prospects, operations, property, financial and other condition and
creditworthiness of the Borrower. Except for notices, reports and other
documents expressly required to be furnished to the Lenders by the
Administrative Agent herein, the Administrative Agent shall not have any duty or
responsibility to provide any Lender with any credit or other information
concerning the business, prospects, operations, property, financial and other
condition or creditworthiness of any of Borrower or any of its Affiliates which
may come into the possession of any Administrative Agent-Related Person. 

          Section
12.7      INDEMNIFICATION OF ADMINISTRATIVE
AGENT. WHETHER OR NOT THE TRANSACTIONS CONTEMPLATED HEREBY ARE CONSUMMATED,
THE LENDERS SHALL INDEMNIFY UPON DEMAND EACH ADMINISTRATIVE AGENT-RELATED PERSON
(TO THE EXTENT NOT REIMBURSED BY OR ON BEHALF OF BORROWER AND WITHOUT LIMITING
THE OBLIGATION OF BORROWER TO DO SO), PRO RATA, AND HOLD HARMLESS EACH
ADMINISTRATIVE AGENT-RELATED PERSON FROM AND AGAINST ANY AND ALL LIABILITIES AND
COSTS INCURRED BY IT; PROVIDED THAT NO LENDER SHALL BE LIABLE FOR THE PAYMENT TO
ANY ADMINISTRATIVE AGENT-RELATED PERSON OF ANY PORTION OF SUCH LIABILITIES AND
COSTS TO THE EXTENT DETERMINED IN A FINAL, NON-APPEALABLE JUDGMENT BY A COURT OF
COMPETENT JURISDICTION TO HAVE RESULTED FROM SUCH ADMINISTRATIVE AGENT-RELATED
PERSON’S OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT; PROVIDED FURTHER THAT NO


87 




ACTION TAKEN IN ACCORDANCE WITH THE DIRECTIONS OF THE REQUIRED
LENDERS SHALL BE DEEMED TO CONSTITUTE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT FOR
PURPOSES OF THIS SECTION 12.7. WITHOUT LIMITATION OF THE FOREGOING, EACH
LENDER SHALL REIMBURSE THE ADMINISTRATIVE AGENT UPON DEMAND FOR ITS RATABLE
SHARE OF ANY COSTS OR OUT-OF-POCKET EXPENSES (INCLUDING ATTORNEYS’ FEES AND
EXPENSES) INCURRED BY THE ADMINISTRATIVE AGENT IN CONNECTION WITH THE
PREPARATION, EXECUTION, DELIVERY, ADMINISTRATION, MODIFICATION, AMENDMENT OR
ENFORCEMENT (WHETHER THROUGH NEGOTIATIONS, LEGAL PROCEEDINGS OR OTHERWISE) OF,
OR LEGAL ADVICE IN RESPECT OF RIGHTS OR RESPONSIBILITIES UNDER, THIS AGREEMENT,
ANY OTHER LOAN DOCUMENT, OR ANY DOCUMENT CONTEMPLATED BY OR REFERRED TO HEREIN,
TO THE EXTENT THAT THE ADMINISTRATIVE AGENT IS NOT REIMBURSED FOR SUCH EXPENSES
BY OR ON BEHALF OF THE BORROWER. THE UNDERTAKING IN THIS SECTION 12.7
SHALL SURVIVE TERMINATION OF THE MAXIMUM COMMITMENTS, THE PAYMENT OF ALL OTHER
OBLIGATIONS AND THE RESIGNATION OF THE ADMINISTRATIVE AGENT. 

          Section
12.8      Administrative Agent in its
Individual Capacity. MBL and its Affiliates may make loans to, acquire
Equity Interests in and generally engage in any kind of financial advisory,
underwriting or other business with the Borrower and its Affiliates as though
MBL were not the Administrative Agent hereunder and without notice to or consent
of the Lenders. The Lenders acknowledge that, pursuant to such activities, MBL
or its Affiliates may receive information regarding Borrower or its Affiliates
(including information that may be subject to confidentiality obligations in
favor of Borrower or such Affiliate), and the Lenders further acknowledge that
the Administrative Agent shall be under no obligation to provide such
information to any of them. With respect to its Advances, MBL, in its individual
capacity as a Lender, shall have the same rights and powers under this Agreement
as any other Lender and may exercise such rights and powers as though it were
not the Administrative Agent, and the terms “Lender” and “Lenders”
include MBL in its individual capacity. 

          Section
12.9      Successor Administrative Agent.
Subject to the appointment and acceptance of a successor Administrative Agent as
provided in this Section 12.9, the Administrative Agent may resign as
Administrative Agent upon thirty (30) days notice to the Lenders and the
Administrative Agent may be removed at any time with or without cause by the
Required Lenders. If the Administrative Agent resigns or is removed under this
Agreement, the Required Lenders shall appoint from among the Lenders a successor
Administrative Agent for the Lenders. Such appointment will be made with the
consent of the Borrower (such consent not to be unreasonably withheld,
conditioned or delayed) unless an Event of Default exists, in which case
Borrower’s consent will not be required. If no successor Administrative Agent is
appointed prior to the effective date of the resignation or retirement of the
Administrative Agent, the Administrative Agent may appoint, after consulting
with the Lenders and the Borrower, a successor Administrative Agent from among
the Lenders. Upon the acceptance of its appointment as successor Administrative
Agent hereunder, the Person acting as such successor Administrative Agent shall
succeed to all the rights, powers and duties of the retiring or removed
Administrative Agent and the term “Administrative Agent” shall mean such
successor Administrative Agent and the retiring or removed Administrative
Agent’s appointment, powers 

88 




and duties as Administrative Agent shall be terminated. After
any retiring Administrative Agent’s resignation or removal hereunder as
Administrative Agent, the provisions of this Article XII shall
inure to its benefit as to any actions taken or omitted to be taken by it while
it was Administrative Agent under this Agreement. If no successor Administrative
Agent has accepted appointment as Administrative Agent by the date which is
thirty (30) days following a retiring Administrative Agent’s notice of
resignation, the retiring or removed Administrative Agent’s resignation or
removal shall nevertheless thereupon become effective and the Lenders shall
perform all of the duties of the Administrative Agent hereunder until such time,
if any, as the Required Lenders appoint a successor Administrative Agent as
provided for above. 

          Section
12.10      Administrative Agent May File Proofs
of Claim. In case of the pendency of any receivership, insolvency,
liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or
other judicial proceeding relative to Borrower, the Administrative Agent
(irrespective of whether the principal of Loan shall then be due and payable as
herein expressed or by declaration or otherwise and irrespective of whether the
Administrative Agent shall have made any demand on Borrower) shall be entitled
and empowered, by intervention in such proceeding or otherwise: 

                         (a)     
to file and prove a claim for the whole amount of the principal and interest
owing and unpaid in respect of the Loan, and all other Obligations that are
owing and unpaid and to file such other documents as may be necessary or
advisable in order to have the claims of the Lenders and the Administrative
Agent (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Lenders and the Administrative Agent and their
respective Administrative Agents and counsel and all other amounts due the
Lenders and the Administrative Agent under Section 2.13 and Section
13.10 allowed in such judicial proceeding; and 

                         (b)      to
collect and receive any monies or other property payable or deliverable in
respect of any such claims and to distribute the same; and any custodian,
receiver, assignee, trustee, liquidator, sequestrator or other similar official
in any such judicial proceeding is hereby authorized by each Lender to make such
payments to the Administrative Agent and, in the event that the Administrative
Agent shall consent to the making of such payments directly to the Lenders, to
pay to the Administrative Agent any amount due for the reasonable compensation,
expenses, disbursements and advances of the Administrative Agent and its
Administrative Agents and counsel, and any other amounts due the Administrative
Agent under Section 2.13 and Section 13.10. 

Nothing contained herein shall be deemed to authorize the
Administrative Agent to authorize or consent to or accept or adopt on behalf of
any Lender any plan of reorganization, arrangement, adjustment or composition
affecting the Obligations or the rights of any Lender or to authorize the
Administrative Agent to vote in respect of the claim of any Lender in any such
proceeding. 

          Section
12.11      Collateral Matters. 

                         (a)     
Collateral Matters.

89 




          (i)      Each
Lender authorizes and directs Administrative Agent to enter into the Security
Documents for the ratable benefit of Lenders. Each Lender agrees that (A) any
action taken by Administrative Agent in respect of any Collateral in accordance
with the provisions of this Agreement or the Security Documents and (B) the
exercise by Administrative Agent of powers in respect of the Collateral set out
in any Security Documents, together with other reasonably incidental powers,
shall be authorized by and binding upon all Lenders. 

          (ii)      In
the event any Lien under any Security Document is, on its face, granted to a
Lender rather than to Administrative Agent (for the ratable benefit of all
Lenders), the Administrative Agent, Lenders, and Borrower confirm that it is
their intent that all such Liens shall be granted (or deemed granted) to
Administrative Agent for the ratable benefit of all Lenders. All such Security
Documents are hereby amended to the extent necessary to reflect that the Liens
granted under those Security Documents are granted to Administrative Agent (for
the ratable benefit of all Lenders), and Borrower hereby grant all Liens under
all Security Documents to Administrative Agent, for the ratable benefit of
Lenders. 

          (iii)      Administrative
Agent is authorized on behalf of all Lenders, without the necessity of any
notice to or further consent from any Lender, from time to time while no Default
or Event of Default exists, to take any action with respect to any Collateral or
Security Documents that may be necessary to perfect and maintain the perfection
of the Liens upon the Collateral granted by the Security Documents. 

          (iv)      Administrative
Agent has no obligation whatsoever to any Lender or to any other Person to
assure that the Collateral exists or is owned by the party pledging the
Collateral or is cared for, protected or insured or has been encumbered or that
the Liens granted to Administrative Agent for the benefit of Lenders under the
Security Documents have been properly or sufficiently or lawfully created,
perfected, protected or enforced, or are entitled to any particular priority.


          (v)      Administrative
Agent shall exercise the same care and prudent judgment with respect to the
Collateral and the Security Documents as it normally and customarily exercises
in respect of similar collateral and security documents. 

                         (b)     
Release Collateral. Lenders irrevocably authorize the Administrative
Agent, at its option and in its discretion, to release any Lien or encumbrance
on any property granted to or held by the Administrative Agent under any Loan
Document or Security Document (i) upon termination of the Maximum Commitments
and payment in full of all Obligations (other than contingent indemnification
obligations), (ii) that is sold or to be sold as part of or in connection with
any sale permitted under the Agreement or under any other Loan Document, or
(iii) if approved, authorized or ratified in writing by the Required Lenders.


                         (c)     
Subordinate Liens. Lenders irrevocably authorize the Administrative
Agent, at its option and in its discretion, to subordinate any Lien or
encumbrance on any property granted to or held by the Administrative Agent under
any Loan Document or Security Document 

90 




to the holder of any Lien or encumbrance on such property that
constitutes a purchase money lien or a capital lease. 

                         (d)     
Confirm Authority. Upon request by the Administrative Agent at any time,
the Required Lenders will confirm in writing the Administrative Agent’s
authority to release or subordinate its interest in particular types or items of
property. 

          Section
12.12      Advance Procedure.

                         (a)      Subject
to compliance with Section 2.6 and Article IX, Borrower may
request the Advance of the Loan by submitting an Advance Request to
Administrative Agent, and Administrative Agent shall promptly notify each Lender
of the Advance Request and its contents. An Advance Request is irrevocable and
binding on Borrower. Each Advance Request must be received by Administrative
Agent no later than 12:00 p.m. Houston, Texas, Time on the third
(3rd) Business Day preceding the proposed Advance date. 

                         (b)     
By 11:00 a.m. Houston, Texas, time on the Advance date, each Lender shall remit
its Percentage Share of each requested Advance by wire transfer to
Administrative Agent pursuant to Administrative Agent’s wire transfer
instructions on Annex I (or as otherwise directed by Administrative
Agent) in funds that are available for immediate use by Administrative Agent.
Subject to receipt of such funds, Administrative Agent shall make such funds
available to Borrower as directed in the Advance Request (unless it has actual
knowledge that any applicable condition precedent has not been satisfied by
Borrower). 

                         (c)      Absent
contrary written notice from a Lender, Administrative Agent may assume that each
Lender has made its Percentage Share of the requested Advance available to
Administrative Agent on the applicable Advance date, and Administrative Agent
may, in reliance upon such assumption (but is not required to), make available
to Borrower a corresponding amount. If a Lender fails to make its Percentage
Share of any requested Advance available to Administrative Agent on the
applicable Advance date, Administrative Agent may (to the extent such amount was
actually advanced to Borrower) recover the applicable amount on demand from that
Lender, together with interest at the Federal Funds Rate for the period
commencing on the date the amount was made available to Borrower by
Administrative Agent and ending on (but excluding) the date Administrative Agent
recovers the amount from that Lender. 

          Section
12.13      Payments. Borrower shall make
each payment on the Obligations as provided in this Agreement, provided that all
such payments shall be paid to Administrative Agent and shall be without offset,
counterclaim or deduction. Any payment of the Obligations from Borrower or any
of its Affiliates which is received by any Lender (including under
Section 11.4), shall be promptly forwarded to Administrative
Agent. Payments received after the designated time will be deemed received on
the next Business Day. Administrative Agent shall pay each Lender any payment to
which that Lender is entitled on the Business Day following the day
Administrative Agent receives the funds from Borrower. If and to the extent that
Administrative Agent does not make a payment to Lenders when due, the unpaid
amounts shall accrue interest at the Federal Funds Rate from the due date until
(but not including) the date paid. 

91 




          Section
12.14      Application of Payments.

                         (a)      If
no Default or Event of Default then exists, all scheduled payments shall be
applied ratably in accordance with Section 2.9(d) above. 

                         (b)      If
no Default or Event of Default then exists, all prepayments shall be applied
ratably in accordance with Section 2.9(d) above. 

                         (c)      All
proceeds realized from the liquidation or other disposition of Collateral or
otherwise received after maturity of the Promissory Notes, whether by
acceleration or otherwise, shall be applied: first, to reimbursement of expenses
and indemnities provided for in this Agreement and the Security Documents;
second, to accrued interest on the Promissory Notes; third, to fees; fourth, pro
rata to principal outstanding on the Promissory Notes and Obligations in respect
of the Swap Agreement; fifth, to any other Obligations; and any excess shall be
paid to the Borrower or as otherwise required by any Governmental Requirement.


          Section
12.15      Liens. The Liens granted by
Borrower under the Loan Documents are granted to the Administrative Agent for
the ratable benefit of the Lenders. It is the intent of the Lenders that they
share an equal priority Lien in all of the Collateral, regardless of any
previous recordations or filings, the name of the grantee or secured party in
the applicable Security Document, and regardless of the timing of any additional
recordations or filings, and that the enforcement of all of their respective
rights and remedies under the Loan Documents is subject to the terms and
provisions of this Agreement. ALL LIENS OF ANY LENDER (ACTING IN ANY CAPACITY
UNDER ANY OF THE LOAN DOCUMENTS) IN ANY OF THE COLLATERAL SHALL BE PARI
PASSU WITH ALL LIENS OF THE OTHER LENDERS IN SUCH COLLATERAL AND ALL SUCH
LIENS SHALL HAVE EQUAL PRIORITY. 

          Section
12.16      Payment Priority. The right of each
Lender to receive any payments or prepayments under or in respect of the
Agreement, any Loan Document, or any Collateral shall be pari passu with
the payment rights of all other Lenders acting in their capacity as a Lender
pursuant to this Agreement, provided that payments of principal and interest
will be allocated to each Lender in accordance with its Pro Rata Share of such
payment or prepayment. 

          Section
12.17      Sharing of Payments by Lenders. If
any Lender shall, by exercising any right of set-off or counterclaim or
otherwise, obtain payment in respect of any principal of or interest on any of
its Advances or fees resulting in such Lender receiving payment of a greater
proportion of the aggregate amount of its Advances or fees and accrued interest
thereon than the proportion received by any other Lender, then the Lender
receiving such greater proportion shall purchase (for cash at face value)
participations in the Advances or fees of other Lenders to the extent necessary
so that the benefit of all such payments shall be shared by the Lenders ratably
in accordance with the aggregate amount of principal of and accrued interest on
their respective Advances; provided that (a) if any such participations are
purchased and all or any portion of the payment giving rise thereto is
recovered, such participations shall be rescinded and the purchase price
restored to the extent of such recovery, without interest, and (b) the
provisions of this Section 12.17 shall not be construed to apply to any
payment made by the Borrower pursuant to and in accordance with the express
terms of this Agreement or any payment obtained by a Lender as consideration for
the assignment of or sale of a participation in any of its Advances to 

92 




any assignee or participant, other than to the Borrower or any
Affiliate thereof (as to which the provisions of this Section 12.17 shall
apply). The Borrower consents to the foregoing and agrees, to the extent it may
effectively do so under applicable law, that any Lender acquiring a
participation pursuant to the foregoing arrangements may exercise against the
Borrower rights of set-off and counterclaim with respect to such participation
as fully as if such Lender were a direct creditor of the Borrower in the amount
of such participation. 

          Section
12.18      Relationship of Lenders. This
Agreement, and the documents delivered in connection herewith, does not create a
partnership or joint venture among Administrative Agent and Lenders or among the
Lenders. 

          Section
12.19      Actions by Administrative Agent.
Notwithstanding Section 12.1 above, the Administrative Agent shall not
take any of the following actions (collectively, the “Material
Changes”): 

                         (a)      increase
the Commitment of any Lender without the written consent of such Lender; 

                         (b)      reduce
the principal amount of any Advance or reduce the rate of interest thereon, or
reduce any fees payable hereunder, or reduce any other Obligations hereunder or
under any other Loan Document, without the written consent of each Lender
affected thereby; 

                         (c)      postpone
the scheduled date of payment of the principal amount of any Advance, or any
interest thereon, or any fees payable hereunder, or any other Obligations
hereunder or under any other Loan Document, or reduce the amount of, waive or
excuse any such payment, or postpone or extend the Availability Termination Date
without the written consent of each Lender affected thereby; 

                         (d)     
change this Agreement in a manner that would alter the pro rata sharing of
payments required thereby, without the written consent of each Lender; 

                         (e)      release
any of the Collateral (except as expressly provided in Section
12.11(b) above); 

                         (f)      change
Section 6.26, without the written consent of each Lender; or 

                         (g)      change
(A) any of the provisions of this Section 12.19, (B) the definition of
“Required Lenders” or (C) any other provision hereof specifying the
number or percentage of Lenders required to (1) waive, amend or modify any
rights hereunder or under any other Loan Documents or (2) make any determination
or grant any consent hereunder or any other Loan Documents, without the written
consent of each Lender. 

ARTICLE XIII 

  MISCELLANEOUS

          Section
13.1      Remedies Cumulative. The rights and
remedies of the Administrative Agent and the Lenders under this Agreement are
cumulative and non exclusive of any other 

93 




rights or remedies it may have under any other agreement or
instrument, or by operation of law or otherwise. 

          Section
13.2      Assignment. This Agreement is
entered into for the benefit of Borrower and Lenders and their respective
successors and assigns. It will be binding upon and inure to the benefit of
those parties and their respective successors and assigns. The rights and
obligations of Borrower under this Agreement, the Promissory Notes, the other
Security Documents, the Swap Agreement, any Hedging Agreement or any other Loan
Document to which Borrower is a party may not be assigned without Lenders’ prior
written consent. Each of the Lenders may assign, transfer or otherwise dispose
of any of its rights or obligations under this Agreement or any of the other
Loan Documents upon the prior written consent of Borrower, such consent to not
be unreasonably withheld, conditioned or delayed. However, upon the occurrence
and during the continuance of an Event of Default, any Lender may assign,
transfer or otherwise dispose of any of its rights and obligations under this
Agreement or any of the other Loan Documents without the consent of Borrower. To
the extent any Lender assigns to any other Person an interest in the Promissory
Note pursuant to one or more Lender Participation Transactions, Borrower shall
execute and deliver to the Administrative Agent and such Lender any Lender
Participation Documents reasonably necessary in connection with such
transaction, including the issuance by Borrower of one or more replacement
Promissory Notes. Additionally, so long as Borrower’s rights and obligations
hereunder are not adversely affected, Lenders will be entitled to grant and
assign a security interest in its right, title and interest in and to the
Promissory Note, the Security Documents and all other Loan Documents to its
lender or lenders as security for indebtedness of the Lenders. Any Person that
becomes a Lender pursuant to this Section 13.2 shall deliver to Borrower
and the Administrative Agent the applicable forms described in Section
2.15. 

          Section
13.3      Notices. Any notice, demand or
document which either party is required or may desire to give to the other will
be in writing and, except as otherwise provided in this Agreement, given by
messenger, nationally recognized courier, overnight delivery, facsimile or other
electronic transmission, or United States certified mail, postage prepaid,
return receipt requested, addressed to the recipient at the location shown
below, or at any other address as either party may furnish to the other by
notice given in accordance with this provision. 

If to Administrative Agent, to: 

Macquarie Bank Limited, Administrative
Agent 
Houston Representative Office 
500 Dallas Street, Suite 3100

Houston, Texas 77002

Attention:      Michael Sextro

Telephone:     (713) 275-6207

Facsimile:        (713) 275-6222

E-Mail:            michael.sextro@macquarie.com 

with a copy to: 

Macquarie Bank Limited, Administrative
Agent 
Houston Representative Office 

94 




500 Dallas Street, Suite 3100

Houston, Texas 77002 
Attention:      Linda
Cox 
Telephone:     (713) 275-6221

Facsimile:        (713) 275-6222

E-Mail:            
linda.cox@macquarie.com

and 

Macquarie Bank Limited, Administrative
Agent 
Executive Director – Metals and Energy Capital 
Level 15, No. 1
Martin Place 
Sydney 
New South Wales 2000 
Australia

Attention:      Executive Director

Telephone:     +61 2 8232 3333

Facsimile:        +61 2 8232 3590

E-Mail:            
katie.choi@macquarie.com

If to Borrower, to: 

Doral Energy Corp. 
111 N.
Sepulveda Blvd., Suite 250 
Manhattan Beach, California 90266

Attention:      Mr. Paul Kirkitelos

Telephone:     (310) 990-8708

Facsimile:        (253) 541-7833

E-Mail:            
paulk@doralenergy.com 

with a copy to: 

Doral Energy Corp. 
3000 N.
Garfield, Suite 210 
Midland, Texas 79705

Attention:      Pat Seale

Telephone:     (713) 899-1712

Facsimile:        (432) 505-9746

E-Mail:            
pats@doralenergy.com 

          If
to any other Obligor party, the notice will be sent to the Borrower and to the
address set forth in the Security Document or other Loan Document to which the
recipient is a party. 

          Any
notice delivered or made by messenger, telecopy, electronic mail or United
States mail will be deemed to be given on the date of actual delivery as shown
by messenger receipt, the sender’s facsimile machine confirmation or other
verifiable electronic receipt, or the registry or certification receipt.
Notwithstanding the previous sentence, if either party receives from the 

95 




other any message via electronic mail that purports to be a
notice under this Agreement but that contains information that is syntactically
incorrect, garbled or otherwise unintelligible, the recipient will notify the
sender and the message containing the unintelligible information will not be
deemed to be given until it is successfully delivered (including redelivery by
electronic mail) pursuant to this Section 13.3. If the Administrative
Agent or any Lender receives oral notice of any event from an authorized officer
of Borrower, it will not be required to delay the exercise of any rights arising
from the occurrence of that event until it receives written confirmation of the
oral notice. In the event that a discrepancy exists between any notice received
orally and such written confirmation, or in the absence of a written
confirmation, the oral notice, as understood by the Administrative Agent will be
deemed the controlling and proper notice. 

          Section
13.4      Waivers; Amendments.

                         (a)      No
failure on the part of the Administrative Agent or any Lender to exercise and no
delay in exercising, and no course of dealing with respect to, any right, power
or privilege, or any abandonment or discontinuance of steps to enforce such
right, power or privilege, under any of the Loan Documents shall operate as a
waiver thereof, nor shall any single or partial exercise of any right, power or
privilege under any of the Loan Documents preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies of the Administrative Agent and the Lenders hereunder and under the
other Loan Documents are cumulative and are not exclusive of any rights or
remedies that they would otherwise have. No waiver of any provision of this
Agreement or any other Loan Document or consent to any departure by the Borrower
therefrom shall in any event be effective unless the same shall be permitted by
Section 13.4(b), and then such waiver or consent shall be effective only
in the specific instance and for the purpose for which given. Without limiting
the generality of the foregoing, the making of an Advance shall not be construed
as a waiver of any Default, regardless of whether the Administrative Agent or
any Lender may have had notice or knowledge of such Default at the time. 

                         (b)      No
Material Change can be made except pursuant to an agreement or agreements in
writing entered into by the Borrower and each of the Lenders or by the Borrower
and the Administrative Agent with the consent of each of the Lenders, nor can
the rights or duties of the Administrative Agent be modified without the prior
written consent of the Administrative Agent. 

          Section
13.5      Confidentiality. Except as may be
required by Debtor Relief Laws or by law or in response to or in connection with
arbitration proceedings or legal process or in any legal proceeding to enforce
or interpret the Security Documents (including a sale by foreclosure) or any
other document or instrument executed in connection with the Security Documents,
and in any filings necessary or appropriate to create, maintain and perfect
Liens and security interests contemplated by this Agreement, neither party will
release this Agreement or any other document, agreement or instrument relating
to or executed in conjunction with this Agreement, or disclose the substantive
terms of any of them except to its attorneys, accountants or engineers on a need
to know basis, without the prior written consent of the other party; and the
Administrative Agent and each of the Lenders shall maintain the confidentiality
of all documents, certificates, reports, and agreements provided by or obtained
from Borrower or pursuant to this Loan Agreement or any other Loan Document.
Notwithstanding the previous 

96 




sentence, Lenders may disclose the substantive terms of or
furnish its Lenders and potential Lenders and investment bankers and their
respective attorneys, accountants or engineers with copies of this Agreement or
any Security Document or any other Loan Document or instrument relating to or
executed or delivered to any Lender in conjunction with this Agreement without
the consent of Borrower. Neither party or any of their respective Affiliates
will issue any press release or make any other public announcement relating to
this Agreement without the prior written consent of the other party;
provided, however, Lenders and Borrower may each publish a
“tombstone” announcement regarding this Agreement. Notwithstanding
anything herein to the contrary, the information protected by this Section
13.5 will not include, and Lenders may disclose to any and all Persons,
without limitation of any kind, any information with respect to the “tax
treatment” and “tax structure” (in each case, within the meaning of
Treasury Regulation Section 1.6011 -4) of the transactions contemplated hereby
and all materials of any kind (including opinions or other tax analyses) that
are provided to Lenders relating to such tax treatment and tax structure; that,
with respect to any document or similar item that in either case contains
information concerning the tax treatment or tax structure of the transaction as
well as other information, this sentence shall only apply to such portions of
the document or similar item that relate. 

          Section
13.6      Final Agreement. This Agreement
and the other agreements to which this Agreement refers, together with all
exhibits, schedules and annexes attached to any of them, constitute the final,
entire agreement among the parties and supersede any prior oral or written and
all contemporaneous oral proposals, commitments, promises, agreements and
understandings between the parties with respect to the subject matter of this
Agreement and the other Loan Documents, all of which are merged into and
replaced by the Loan Documents. 

          Section
13.7      WAIVER OF JURY TRIAL, PUNITIVE DAMAGES,
ETC.. EACH OF BORROWER AND LENDERS KNOWINGLY, VOLUNTARILY, INTENTIONALLY,
AND IRREVOCABLY (a) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY
RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON THIS
AGREEMENT, OR DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN
CONNECTION WITH THE LOAN DOCUMENTS OR ANY TRANSACTION CONTEMPLATED OR ASSOCIATED
WITH ANY OF THEM, BEFORE OR AFTER MATURITY; (b) WAIVES, TO THE MAXIMUM EXTENT
NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH
LITIGATION ANY “SPECIAL DAMAGES,” AS DEFINED BELOW; (c) CERTIFIES THAT
NEITHER IT NOR ANY OF ITS REPRESENTATIVES, AGENTS OR COUNSELORS HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, OR IMPLIED THAT THE CERTIFYING PARTY WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS; AND (d) ACKNOWLEDGES
THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS
AND THE TRANSACTIONS CONTEMPLATED THEREBY, AMONG OTHER THINGS, THE MUTUAL
WAIVERS AND CERTIFICATIONS IN THIS SECTION. AS USED IN THIS SECTION, “SPECIAL
DAMAGES” INCLUDES ALL SPECIAL, CONSEQUENTIAL, INDIRECT, EXEMPLARY, OR
PUNITIVE DAMAGES (REGARDLESS OF HOW NAMED), BUT DOES NOT INCLUDE ANY PAYMENTS OR
FUNDS WHICH ANY PARTY HAS EXPRESSLY PROMISED TO PAY OR DELIVER TO ANY OTHER
PARTY. 

97 




          Section
13.8      GOVERNING LAW. THIS AGREEMENT, THE
PROMISSORY NOTES, THE SWAP AGREEMENT AND EACH OF THE OTHER LOAN DOCUMENTS (OTHER
THAN THE SECURITY DOCUMENTS TO THE EXTENT THEY MAY BE MANDATORILY GOVERNED BY
LAWS OF ANOTHER JURISDICTION) ARE TO BE PERFORMED IN THE STATE OF TEXAS. EXCEPT
TO THE EXTENT THAT THE LAWS OF ANOTHER JURISDICTION ARE MANDATORILY APPLICABLE,
THIS AGREEMENT, THE PROMISSORY NOTE AND ALL OF THE OTHER LOAN DOCUMENTS (EXCEPT
FOR THE SWAP AGREEMENT WHICH WILL BE GOVERNED BY, INTERPRETED AND CONSTRUED
UNDER AND ENFORCED PURSUANT TO THE LAWS OF THE STATE OF NEW YORK) TOGETHER WITH
ALL TRANSACTIONS PROVIDED FOR IN THEM WILL BE GOVERNED BY, INTERPRETED AND
CONSTRUED UNDER AND ENFORCED PURSUANT TO THE LAWS OF THE STATE OF TEXAS WITHOUT
REGARD TO ITS CONFLICTS OF LAWS PROVISIONS. 

          Section
13.9      No Third-Party Beneficiaries. Subject
to Article XI, the benefits of this Agreement will not inure to any third
party. Notwithstanding anything contained in this Agreement or the other Loan
Documents, or any conduct or course of conduct by the parties, before or after
signing this Agreement or the Loan Documents, this Agreement will not be
construed as creating any rights, claims or causes of action against
Administrative Agent, or any of their respective Related Parties by any Person
other than Borrower. 

          Section
13.10      Fees, Costs and Expenses.
Whether or not the transactions contemplated by this Agreement are consummated,
Borrower will promptly (and in any event, within thirty (30) days after any
invoice or other statement or notice) pay all Related Costs. Additionally,
except as otherwise provided herein, Borrower will promptly pay (within thirty
(30) days after receipt of invoice or other statement or notice) (a) all
transfer, stamp, mortgage, documentary or other similar taxes, assessments or
charges levied by any Taxing Authority in respect of this Agreement or any of
the other Loan Documents or any other document referred to herein or therein,
(b) all reasonable costs and expenses incurred by or on behalf of Administrative
Agent (including attorneys’ fees, consultants’ fees and engineering fees, travel
costs and miscellaneous expenses) in connection with (i) the negotiation,
preparation, execution and delivery of any and all consents, waivers and
amendments to any of the Loan Documents, (ii) the filing, recording, refiling
and re recording of any Loan Documents and any other documents or instruments or
further assurances required to be filed or recorded or refiled or re-recorded by
the terms of any Loan Document, (iii) the borrowings hereunder and other action
reasonably required in the course of administration hereof, and (iv) monitoring
or confirming (or preparation or negotiation of any documents related to)
Borrower’s compliance with any covenants or conditions contained in this
Agreement or in any other Loan Document, and (c) all reasonable costs and
expenses incurred by or on behalf of Administrative Agent and Lenders (including
attorneys’ fees, consultants’ fees and accounting fees) in connection with the
defense or enforcement of any of the Loan Documents (including this section) or
the defense of Administrative Agent’s and Lenders’ exercise of rights
thereunder. In addition, except as otherwise provided herein, until all
Obligations are paid in full, Borrower shall also pay or reimburse Lenders for
all reasonable out-of-pocket costs and expenses of Administrative Agent and
Lenders or its agents or employees in connection with the continuing
administration of the Loan and the related due diligence of Administrative Agent
and Lenders, including travel and miscellaneous expenses and fees and 

98 




expenses of Administrative Agent’s and Lenders’ outside
counsel, reserve engineers and consultants engaged in connection with the Loan
Documents. 

          Section
13.11      Compliance with Law. It is the
intention of the parties to comply with applicable usury laws (now or later
enacted). Accordingly, and notwithstanding any provision to the contrary in this
Agreement, the other Security Documents or any other Loan Document, in no event
will this Agreement or any other Loan Document require the payment or permit the
collection of interest in excess of the maximum amount permitted by those laws.
If, under any circumstances, the fulfillment of any provision of this Agreement
or of any other Loan Document will involve exceeding the limit prescribed by
applicable law for the contracting for or charging or collecting interest, then
the obligation to be fulfilled will, ipso facto, be reduced to the allowable
limit, and if, under any circumstances, any Lender ever receives pursuant to any
of the Loan Documents anything of value as interest or that is deemed to be
interest under applicable law that would exceed the highest lawful rate, the
amount that would otherwise be excessive interest will be applied to the
reduction of the principal amount owing under the Promissory Note or on account
of any other indebtedness owed by Borrower to Lender, and not to the payment of
interest; or, if any portion of the excessive interest exceeds the unpaid
balance of principal of that indebtedness, then the excess amount will be
refunded to Borrower. In determining whether or not the interest paid or payable
with respect to any indebtedness owed by Borrower to any Lender exceeds the
highest lawful rate, Borrower and such Lender will, to the maximum extent
permitted by applicable law, (a) characterize any non principal payment as an
expense, fee or premium rather than as interest, (b) exclude voluntary
prepayments and the effects of them, (c) amortize, prorate, allocate and spread
the total amount of interest throughout the full term of the indebtedness so
that the actual rate of interest on account of the indebtedness does not exceed
the maximum amount permitted by applicable law, and (d) allocate interest
between portions of the indebtedness so that no portion will bear interest at a
rate greater than that permitted by applicable law. 

          Section
13.12      Power of Attorney; Etc. Borrower
grants to Administrative Agent a power of attorney for the purpose of executing
on behalf of Borrower, at any time that an Event of Default exists, documents
related to the enforcement of Administrative Agent’s the Lenders’ rights under
the Security Documents, including but not limited to the execution of any
instrument to be filed with or approved by any applicable Governmental Authority
in the event of a foreclosure on any of the Property. The power of attorney
granted to Administrative Agent by Borrower under this Section 13.12 is a
right coupled with an interest and will be irrevocable for as long as any of the
Obligations remain outstanding provided, however that
Administrative Agent and the Lenders agree not to exercise the power of attorney
described in this Section 13.12 prior to the occurrence of an Event of
Default. 

          Section
13.13      Obligations are Non-Recourse to
Members. Neither the Administrative Agent nor any Lender nor their
respective successors or assigns, nor any holder or holders of the Promissory
Notes will have any claim, remedy, or right to proceed (at law or in equity)
against any of members, shareholders or partners, as applicable, of Borrower or
its respective officers, directors, employees or agents for the payment or
performance of any of the Obligations. Notwithstanding the previous sentence,
however, nothing contained in this section will limit, restrict, or impair the
rights of the holders of the Promissory Note to (a) accelerate the maturity of
the Promissory Note during the continuation of an Event of Default, (b) bring
suit and obtain a 

99 




judgment against Borrower on the Promissory Note, (c) exercise
all of the Administrative Agent’s rights and remedies under each of the Security
Documents, including the right to foreclose or otherwise realize upon the
Collateral and collect sums due or to become due in connection with the
Collateral, or (d) exercise any of the other rights of a Lender under this
Agreement or any of the other Loan Documents. 

          Section
13.14      Severability. Any section,
clause, subsection, sentence, paragraph, provision or term this Agreement held
invalid, illegal, or ineffective by a court of competent jurisdiction will not
impair, invalidate or nullify the remainder of this Agreement. 

          Section
13.15      Captions; Headings. The headings,
captions and arrangements contained in this Agreement have been inserted for
convenience only and will not be deemed in any manner to modify, explain,
enlarge or restrict any provision in this Agreement. 

          Section
13.16      Construction. Borrower,
Administrative Agent and Lenders acknowledge that each of them has had the
benefit of legal counsel of its own choice and has been afforded an opportunity
to review this Agreement, the Promissory Note and each of the other Loan
Documents with its legal counsel and that this Agreement and the other Security
Documents will be construed as if jointly drafted by Borrower and Lenders. In
the event of a conflict between the terms of this Agreement and the Security
Documents, the terms of this Agreement shall be controlling. 

          Section
13.17      Additional Documents. From time to
time after the date of this Agreement, each of the parties hereto agrees to
execute and deliver or cause to be executed and delivered, all reasonable
documents and instruments, and take any other reasonable and lawful action as
the other party may deem necessary or desirable to perfect or evidence
perfection of its security interest, to enforce its rights under this Agreement
or to otherwise effectuate the purposes of this Agreement. Upon the full payment
and complete discharge of Borrower’s Obligations under this Agreement and the
other Loan Documents, Administrative Agent or Lenders will, at the request and
expense of Borrower, prepare and deliver documents evidencing the release and
termination of the Liens, security interests, and other interests of Lenders
under the Security Documents. 

          Section
13.18      Counterpart Execution. This
Agreement may be executed simultaneously in one or more counterparts, each of
which will be deemed an original, but all of which together will constitute one
and the same instrument. 

        Section
13.19      EXCULPATION PROVISIONS. EACH OF THE
PARTIES AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND EACH OF THE OTHER
LOAN DOCUMENTS AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE
TERMS OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS; THAT IT HAS IN FACT READ
THIS AGREEMENT AND EACH OF THE OTHER LOAN DOCUMENTS AND IS FULLY INFORMED AND
HAS FULL NOTICE AND KNOWLEDGE OF THE TERMS AND CONDITIONS CONTAINED IN THEM;
THAT IT HAS BEEN REPRESENTED BY INDEPENDENT LEGAL COUNSEL OF ITS CHOICE
THROUGHOUT THE NEGOTIATION OF EACH OF THE LOAN DOCUMENTS AND HAS RECEIVED THE
ADVICE OF ITS LEGAL COUNSEL IN ENTERING INTO THE LOAN 

100 




DOCUMENTS; AND THAT IT RECOGNIZES THAT CERTAIN TERMS OF THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS RESULT IN ONE PARTY ASSUMING THE
LIABILITY INHERENT IN SOME ASPECTS OF THE TRANSACTION AND RELIEVING THE OTHER
PARTY OF ITS RESPONSIBILITY FOR THAT LIABILITY. EACH PARTY AGREES AND COVENANTS
THAT IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY
PROVISION OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS ON THE BASIS THAT
THE PARTY HAD NO NOTICE OR KNOWLEDGE OF THE PROVISION OR THAT THE PROVISION IS
NOT “CONSPICUOUS.” 

          Section
13.20      Obligations Joint and Several. The
obligations and liabilities of the Borrower in this Agreement shall be joint and
several. 

          Section
13.21      NO OTHER AGREEMENTS; NO PAROL
EVIDENCE. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE MATTERS ADDRESSED IN THEM AND
CANNOT AND WILL NOT BE CONTRADICTED BY EVIDENCE OF ANY PRIOR, CONTEMPORANEOUS,
OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. 

          THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 

[SIGNATURES BEGIN ON THE FOLLOWING PAGE] 

101 




          IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as
of July 29, 2008. 

BORROWER: 

DORAL ENERGY
CORP., 
a Nevada corporation 

	 	By: 	/s/ Paul Kirkitelos 
	 	  	Paul Kirkitelos 
	 	  	President and Chief Executive
      Officer 


SIGNATURE PAGE TO THE CREDIT AGREEMENT 




          IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as
of July 29, 2008. 

ADMINISTRATIVE AGENT and a
LENDER: 

MACQUARIE BANK
LIMITED, 
a bank incorporated under the laws of Australia,

the Administrative Agent and a Lender 


By:          /s/
Andrew
Sinclair                                                     

Name:    Andrew
Sinclair                                                             

Title:      Division
Director                                                           



By:         
/s/ Thomas Cullinan
                                                   
Name:   
Thomas Cullinan
                                                           
Title:     
Attorney                                                                         


SIGNATURE PAGE TO THE CREDIT AGREEMENT 




EXHIBIT A 

Description of Properties; Interests 

See attached. 






































































































































































































EXHIBIT B 

Form of Promissory Note 

See attached. 

























EXHIBIT C 

Form of Advance Request 

See attached. 




ADVANCE REQUEST 

          This
  Advance Request is submitted to MACQUARIE BANK LIMITED, a bank incorporated
  under the laws of Australia (“Lender”), by DORAL ENERGY CORP., a Nevada
  corporation (“Borrower”), pursuant to the Senior First Lien Secured
  Credit Agreement dated July __, 2008 (as amended, the “Credit
    Agreement”), among Lender and Borrower. Capitalized terms used but not
  otherwise defined herein shall have the same meaning given them in the Credit
  Agreement. The Borrower hereby requests an Advance under the Credit Agreement in
  the amount set forth below: 


  	1. 	Amount of Advance requested from: 	 	 
	 	 	 	 
	 	                          Tranche
        A (Revolver) 	$ 	 
	 	                          Tranche
        B (Term) 	 	 
	 	                          Tranche
        B-1 	$ 	 
	 	                          Tranche
        B-2 	$ 	 
	 	 	 	 
	2. 	Total principal amount currently outstanding (excluding this
        request) under: 		
	 	 	 	 
	 	                          Tranche
        A (Revolver) 	$ 	 
	 	                          Tranche
        B (Term) 	 	 
	 	                          Tranche
        B-1 	$ 	 
	 	                          Tranche
        B-2 	$ 	 
	 	 	 	 
	3. 	Availability remaining (excluding this request) under the portion
        of the Tranche from which this Advance is requested (Line 3 must be greater
        than Line 1): 		
	 	 	 	 
	 	                          Tranche
        A (Revolver) 	$ 	 
	 	                          Tranche
        B (Term) 	 	 
	 	                          Tranche
        B-1 	$ 	 
	 	                          Tranche
        B-2 	$ 	 
	 	 	 	 
	4. 	Requested Funding Date: January __, 2008. 	 	 
	 	 	 	 
	5. 	Contract Rate: LIBOR ______  Interest Period (circle one):          
        30        60    
         90           
        days		
	 	                          PRIME
        ______	 	 






	6. 	Borrower hereby warrants and represents to Lender that
      the following statements are true and correct as of the date of this
      Advance Request:

	 	 	 
		a. 	Each of the documents previously delivered to Lender
      pursuant to Sections 9.2 and 9.3 of the Credit Agreement, as
      applicable, are in full force and effect and have not been terminated,
      amended or modified;









	 	b. 	All representations and warranties of Borrower under the
      Credit Agreement and in the Security Documents including, but not limited
      to, those made in Article IV of the Credit Agreement, are true,
      complete and correct in all material respects;

	 	 	 
	 	c. 	Except as set forth in Exhibit A, attached hereto,
      there is and, after giving effect to the requested Advance, there will be
      no Default or any event which with notice or the passage of time would
      become an Event of Default under the Credit Agreement or any of the
      Security Documents;

	 	 	 
	 	d. 	Attached to this Advance Request as Exhibit B are
      all approved AFEs, invoices and other supporting documentation evidencing
      the amount to be paid out of the Advance, including an updated AFE showing
      on a line-item basis the amounts drawn to date (including the amount to be
      paid out of the requested Advance);

	 	 	 
	 	e. 	The sum of (i) the principal amount outstanding
      under the Loan plus (ii) the amount of the Advance requested
      hereunder, does not exceed the applicable Maximum Commitment;
      and

	 	 	 
	 	f. 	The Amount of the Advance requested exceeds minimum
      amount of one hundred thousand dollars ($100,000) except to the extent a
      lesser amount remains available under the Revolving Loan or under the
      particular Tranche from which this Advance is requested.

	 	 	 
	 	g. 	The Advance is being made to an account set forth in Schedule 4.42 of the Credit Agreement unless otherwise agreed in
      writing by Lender.



          Each
  of the undersigned certifies that he is a duly elected, qualified and Authorized
  Officer of Borrower, and that as such is authorized to execute this certificate
  on behalf of Borrower. The undersigned further certifies, represents and
  warrants on behalf of Borrower that it is entitled to receive the requested
  borrowing under the terms and conditions of the Credit Agreement. 

[SIGNATURE APPEARS ON THE FOLLOWING PAGE.] 




EXECUTED this ___ day of ______, 200_. 

BORROWER: 

DORAL ENERGY CORP., 

A NEVADA CORPORATION 

	 	By: 	 
	 	Printed 	 
	 	Name:	 
	 	Title:	 


SIGNATURE PAGE TO ADVANCE REQUEST 




Exhibit A 

  to the Advance Request 

  dated 

  January
  __, 2008 

Defaults; Events of Default 

None. 




Exhibit B 

  to the Advance Request 

  dated 

 

 



  July __, 2008 

Supporting Documentation

	 	 	 $	
	 	 	 $	
	 	 	 $	
	 	 	 $	
	 	 	 $	
	 	 	 $	
	 	 	 	 
	               
         TOTAL 	 	 $	
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	WIRING INSTRUCTIONS: 	 	 	 
	 	 	 	 
	________________________ 	 	 	 
	________________________ 	 	 	 
	 ________________________	 	 	 
	 ________________________	 	 	 
	 	 	 	 






EXHIBIT D 

Form of Property Operating Statement

See attached. 
















EXHIBIT E 

Existing and Approved Purchasers


  	CONTRACT 

          TYPE, DATE 	

          PURCHASER NAME 	PURCHASER/OPERATOR 

          ADDRESS AND
            CONTACT 	PROPERTY(IES) 

          AND/OR
            WELL(S) 
	Gas Purchase Contract; 

        dated May 20, 2002 

        

        

        
	Duke Energy Field 

        Services, LP (now DCP 

        Midstream, LLC) 

        

        
	DCP Midstream, LLC 

        3300 North “A” Street, 

        Building 7 

        Midland, TX 79705 

        fax 915-620-4170 
	Various parts of Sections 

        3, 4, 5, 8 and 10
        of T17S, 

        R28E (see contract) 

        

        Eddy County, New 

        Mexico 
	Gas Purchase Contract 

        dated June 6, 2002 

        

        
	Duke Energy Field 

        Services, LP (now DCP 

        Midstream, LLC) 

        
	DCP Midstream, LLC 

        3300 North “A” Street, 

        Building 7 

        Midland, TX 79705 

        fax 915-620-4170 	Various leases 

          

        Eddy County, New 

        Mexico 

	Lease Crude Oil Purchase 

        Agreement; 

        dated October
        23, 2003 

        

        

        

        
	ConocoPhillips Company 

          

        

        

        

        

        
	Jack Cartmill 

        Lease Operations 

        ConocoPhillips Company 

        505 N. Big Spring Street, 

        Suite 600 

        Midland, TX 79701 

        ph. 915-682-8241 

        fax 915-686-7922 	Sackett Federal 1 

        Sackett Federal 2 

        General American 

        Federal 

        

        Eddy County, New 

        Mexico 

	Oil Purchase Agreement; 

        as amended dated 

        September
        9, 2007 

        

        

        
	Navajo Refining 

        Company, LP 

        

        

        

        
	Kim Anderson 

        Contract Administration 

        Navajo Refining Company, LP 

        303 West Wall, Suite 1200 

        Midland,
        TX 79701 

        ph. 432-682-7900 

        fax 432-682-1318 	Sackett Federal 1 

        Sackett Federal 2 

        General American 

        Federal 

        

        Eddy County, New 

        Mexico 








EXHIBIT F 

Form of Security Agreement 

See attached. 




SECURITY AGREEMENT 

  (All Assets) 

          THIS
  SECURITY AGREEMENT (this “Security Agreement”), is made and entered into
  as of July ___, 2008, by DORAL ENERGY CORP., a Nevada corporation
  (“Debtor”), whose address is 111 N. Sepulveda Blvd., Suite 250, Manhattan
  Beach, California 90266, in favor of MACQUARIE BANK LIMITED, a bank incorporated
  under the laws of Australia, as Administrative Agent for the ratable benefit of
  Lenders (as defined in the Credit Agreement) (“Secured Party”), whose
  address is Level 15, No. 1 Martin Place, Metals and Energy Capital, Sydney, NSW
  2000, Australia. 

Background: 

          1.      On
  July ___, 2008, Debtor, as Borrower, the other Lenders party thereto from time
  to time, and Secured Party, as Administrative Agent for such Lenders and as a
  Lender, executed that certain Senior First Lien Secured Loan Credit Agreement
  (as amended, modified or supplemented from time to time, the “Credit
    Agreement”) pursuant to which, Secured Party agreed to make loans to Debtor
  from time to time on the conditions set forth in the Credit Agreement.

          2.      Secured
  Party has conditioned its obligations under the Credit Agreement upon, among
  other things, the execution and delivery by Debtor of this Security Agreement,
  and Debtor has agreed to enter into this Security Agreement. 

Agreements: 

          In
  order to comply with the terms and conditions of the Credit Agreement and for
  and in consideration of the premises and the agreements herein contained and
  other good and valuable consideration, the receipt and sufficiency of which are
  hereby acknowledged, Debtor hereby agrees with Secured Party as follows: 

ARTICLE I 

  DEFINITIONS 

          1.1      Terms
  Defined Above. As used in this Security Agreement, the terms
  “Debtor,” “Secured Party,” and “Credit Agreement” shall
  have the meanings indicated above. 

          1.2      Definitions
  Contained in the Credit Agreement. Unless otherwise defined herein or
  context otherwise requires, all capitalized terms used but not defined in this
  Security Agreement have the meanings given to those terms in the Credit
  Agreement. 

          1.3      Certain
  Definitions. As used in this Security Agreement, the following terms shall
  have the following meanings, unless the context otherwise requires: 

          “Accounts”
  has the meaning indicated in subsection 2.1(a) hereof. 




          “Code”
  means the Uniform Commercial Code as presently in effect in the State of New
  York, and as amended from time to time. 

          “Collateral”
  means all property, including without limitation cash or other proceeds, in
  which Secured Party shall have a security interest pursuant to Section
    2.1 of this Security Agreement. 

          “Default”
  means the occurrence of any of the events specified in Section 5.3 hereof, whether or not any requirement for notice or lapse of time or other
  condition precedent has been satisfied. 

          “Equipment”
  has the meaning indicated in subsection 2.1(b) hereof. 

          “Event
  of Default” means the occurrence of any of the events specified in Section 5.3 hereof; provided that any requirement for notice or
  lapse of time or other condition precedent has been satisfied. 

          “General
  Intangibles” has the meaning indicated in subsection 2.1(c) hereof. 

          “Inventory”
  has the meaning indicated in subsection 2.1(d) hereof. 

          “Other
  Liable Party” means any person, other than Debtor, who is or becomes
  primarily or secondarily liable for any of the Secured Obligations or who grants
  Secured Party a lien on any property as security for the Secured Obligations. 

          “Permitted
  Liens” has the meaning indicated in Section 3.1. 

          “Related
  Rights” means all chattel papers, electronic chattel papers, payment
  intangibles, promissory notes, letter of credit rights, supporting obligations,
  documents and instruments relating to the Accounts or the General Intangibles
  and all rights now or hereafter existing in and to all security agreements,
  leases, and other contracts securing or otherwise relating to any Accounts or
  General Intangibles or any such chattel papers, electronic chattel papers,
  payment intangibles, promissory notes, letter of credit rights, documents and
  instruments. 

          “Secured
  Obligations” has the meaning indicated in Section 2.2 hereof. 

          “Security
  Agreement” means this Security Agreement, as the same may from time to time
  be amended or supplemented. 

          “Security
  Documents” means this Security Agreement together with all financing
  statements filed in connection with this Security Agreement. 

          1.4      Terms
  Defined in Code. Unless otherwise defined herein, all terms used herein
  which are defined in the Code shall have the same meaning herein. 

ARTICLE II 

  SECURITY INTEREST 

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          2.1      Grant
  of Security Interest. As collateral security for all of the Secured
  Obligations, Debtor hereby grants to Secured Party a security interest in, a
  general lien upon, and a right of set-off against all of Debtor’s assets,
  tangible or intangible, including but not limited to the following and whether
  now owned or later acquired: 

          (a)     
  all of Debtor’s accounts (as is defined in the Code) of any kind (the
  “Accounts”); all chattel papers, electronic chattel papers, payment
  intangibles, promissory notes, letter of credit rights, documents and
  instruments relating to the Accounts; and all rights in and to all security
  agreements, leases, and other contracts securing or otherwise relating to any
  Accounts or any such chattel papers, documents and instruments;

          (b)     
  all of Debtor’s equipment (as defined in the Code) in all of its forms, and
  wherever located, together with all parts thereof and all accessions or
  additions thereto, (collectively, the “Equipment”);

          (c)     
  all of Debtor’s general intangibles (as defined in the Code) of any kind (the
  “General Intangibles”); all chattel papers, electronic chattel papers,
  payment intangibles, promissory notes, letter of credit rights, documents and
  instruments relating to the General Intangibles; and all rights in and to all
  security agreements, leases, and other contracts securing or otherwise relating
  to any General Intangibles or any such chattel papers, documents and
  instruments;

          (d)     
  all of Debtor’s inventory (as defined in the Code) in all of its forms, and
  wherever located, together with all accessions or additions thereto and products
  thereof (collectively the “Inventory”);

          (e)     
  all of Debtor’s investment property (as defined in the Code) wherever located; 

          (f)      all
  of Debtor’s deposit accounts (as defined in the Code) wherever located; 

          (g)      any
  additional tangible or intangible property from time to time delivered to or
  deposited with Secured Party as security for the Secured Obligations or
  otherwise pursuant to the terms of this Security Agreement; and 

          (h)     
  the proceeds, products, supporting obligations, Related Rights, additions to,
  substitutions for and accessions of any and all Collateral described in
  subparagraphs (a)–(g) in this Section 2.1. 

          2.2      Secured
  Obligations. The security interest in, general lien upon, and right of
  set-off against the Collateral is granted to secure the following (collectively,
  the “Secured Obligations”): 

          (a)      the
  payment of all the Obligations (as defined in the Credit Agreement) of Debtor to
  Secured Party now or hereafter existing including, without limitation, the Debt
  of Debtor under the Promissory Note, and any and all renewals, extensions for
  any period or rearrangement of the Obligations; and 

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          (b)     
  the performance of all obligations of Debtor under this Security Agreement and
  the other agreements giving rise to the Obligations (as defined in the Credit
  Agreement).

ARTICLE III

  REPRESENTATIONS AND WARRANTIES 

          In
  order to induce Secured Party to accept this Security Agreement, Debtor
  represents and warrants to Secured Party (which representations and warranties
  will survive the creation of any Secured Obligations and the extension of any
  credit under the Credit Agreement) that: 

          3.1      Ownership and Liens. Except for the security interest of Secured Party
  granted in this Security Agreement and except for Liens, security interests and
  other encumbrances permitted under the Credit Agreement (“Permitted
    Liens”), Debtor owns good and valid title to the Collateral free and clear
  of any other Liens, adverse claims or options other than Permitted Liens. Debtor
  has rights in or the right, power and authority to grant a security interest in
  the Collateral to Secured Party in the manner provided herein, free and clear of
  any other Liens, adverse claims and options other than Permitted Liens. No other
  Lien, adverse claim or option has been created by Debtor or is known by Debtor
  to exist with respect to any Collateral other than Permitted Liens. No financing
  statement or other security instrument is on file in any jurisdiction covering
  any part of the Collateral other than those in favor of Secured Party other than
  Permitted Liens. At the time the security interest in favor of Secured Party
  attaches, good and valid title to all after-acquired property included within
  the Collateral, free and clear of any other Liens, adverse claims or options
  (other than those permitted by the first sentence of this Section 3.1)
  will be vested in Debtor. 

          3.2      Status of Accounts. Each Account hereafter arising will represent and to
  the best knowledge of Debtor, each Account now existing represents, the valid
  and legally enforceable obligations of a bona fide account debtor and is not and
  will not be subject to contra accounts, set-offs, defenses or counterclaims by
  or available to account debtors obligated on the Accounts except as disclosed to
  Secured Party in writing; and the amount shown as to each Account on Debtor’s
  books will be the true and undisputed amount owing and unpaid thereon, subject
  to any discounts, allowances, rebates, credits and adjustments to which the
  account debtor has a right and which have arisen in Debtor’s ordinary course of
  business or which have otherwise been disclosed to Secured Party in writing. 

          3.3      Status of Related Rights. All Related Rights are, and those hereafter
  arising will be, valid and genuine. 

          3.4      Inventory Not Covered by Other Documents. None of the Inventory is, and
  at the time the security interest in favor of Secured Party attaches none of the
  Inventory hereafter acquired will be, covered by any document (as defined in the
  Code). 

          3.5      Name; Organization; Authority. The exact legal name of Debtor is set
  forth in the opening paragraph of this Security Agreement. Debtor is a
  corporation, duly organized, validly existing, and in good standing under the
  laws of the State of Nevada. Debtor is qualified to do business and in good
  standing in each other state in which the nature of its business requires it to 

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be so qualified, except where the failure to so qualify could
  not reasonably be expected to cause a Material Adverse Effect. The execution,
  delivery and performance of this Security Agreement has been duly authorized by
  all corporate action, and this Security Agreement constitutes the valid and
  binding obligation of Debtor, enforceable against Debtor in accordance with its
  terms, except as the enforceability thereof may be limited or affected by
  bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
  enforcement of creditors rights generally and by general equitable principles. 

          3.6      Location. Debtor’s chief executive office and chief place of business is
  located at the address set forth in the opening paragraph of this Security
  Agreement. The office where Debtor keeps its records concerning the Accounts and
  the General Intangibles and the original of all the Related Rights has the same
  address as Debtor’s chief executive office and chief place of business. Debtor’s
  Inventory and Equipment (other than mobile goods) are located in the States of
  California, Nevada and New Mexico and such other states as Debtor shall have
  from time to time given notice of to Lender. 

          3.7      Secured
  Party’s Security Interest. This Security Agreement creates a valid and
  binding security interest in the Collateral securing the Secured Obligations.
  Upon filing the financing statements described in Section 4.10 of this
  Security Agreement covering the Collateral in the Office of the Secretary of
  State of the State of Nevada, Secured Party will have a fully perfected security
  interest in that Collateral in which a security interest may be perfected by
  filing, subject only to Permitted Liens. No further or subsequent filing,
  recording, registration or other public notice of such security interest is
  necessary in any office or jurisdiction in order to perfect such security
  interest or to continue, preserve or protect such security interest except for
  continuation statements or for filings upon the occurrence of any of the events
  stated in Section 4.10 of this Security Agreement. Such perfected
  security interest in the Collateral constitutes a first-priority security
  interest under the Code, subject only to Permitted Liens. 

ARTICLE IV 

  COVENANTS AND AGREEMENTS 

          A
  deviation from the provisions of this Article IV shall not constitute a
  Default under this Security Agreement if such deviation is consented to in
  writing (in the manner provided in the Credit Agreement) in advance by Secured
  Party. Without the prior written consent of Secured Party, Debtor will at all
  times comply with the covenants contained in this Article IV, from the
  date hereof and for so long as any part of the Secured Obligations (other than
  indemnity obligations and similar obligations that survive the termination of
  the Loan Documents for which no notice of a claim has been received by Debtor)
  or the commitment of Secured Party to make loans under the Credit Agreement is
  outstanding. 

          4.1      Title; Prohibited Liens and Filings. Debtor agrees to protect the title
  to the Collateral. Debtor will not pledge, mortgage, otherwise encumber, create
  or suffer a Lien to exist on any of the Collateral (other than in favor of
  Secured Party or as permitted by the Credit Agreement) or sell, assign or
  otherwise transfer any of the Collateral (other than as permitted by the Credit
  Agreement) to or in favor of any person other than Secured Party. Debtor will
  not file or permit to be filed or recorded any financing statement or other
  security instrument with 

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respect to the Collateral other than in favor of Secured Party
  or as permitted by the Credit Agreement. 

          4.2      Taxes, Etc. Debtor agrees to pay prior to delinquency all taxes, charges,
  Liens and assessments against the Collateral which, if unpaid, might result in
  the imposition of a Lien on the Collateral; provided, however,
  Debtor shall not be required to pay any tax, charge, Lien or assessment that is
  not yet past due or is being contested in good faith by appropriate proceedings
  diligently conducted by or on behalf of Debtor and if Debtor shall have set up
  reserves therefor adequate under GAAP. 

          4.3      Possession of Collateral. Secured Party shall be deemed to have
  possession of any of the Collateral in transit to it or set apart for it.
  Otherwise, the Collateral shall remain in Debtor’s possession or control at all
  times (except where Secured Party chooses to perfect its security interest by
  possession in addition to the filing of a financing statement) at Debtor’s risk
  of loss and shall (except for temporary removal consistent with its normal use)
  be kept at locations owned or leased by Borrowers. 

          4.4      Inspection of Collateral. Upon reasonable notice, Secured Party may from
  time to time during normal business hours, inspect Debtor’s records concerning
  the Accounts and the General Intangibles, the originals of the Related Rights,
  the Equipment, the Inventory and other Collateral but not as to unreasonably
  interfere with the business of Debtor. 

          4.5      Further Assurances. Debtor will from time to time sign, execute, deliver
  and file, alone or with Secured Party, upon reasonable request, any financing
  statements, security agreements or other documents necessary or convenient to
  perfect or continue in favor of Secured Party a first-priority security interest
  in the Collateral; procure any necessary instruments or documents as may be
  reasonably requested by Secured Party; and take all further action that may be
  necessary or desirable, or that Secured Party may reasonably request, to
  confirm, perfect, preserve and protect the security interests intended to be
  granted hereby. Notwithstanding the previous sentence, however, Debtor hereby
  authorizes Secured Party to execute and deliver on behalf of Debtor and to file
  such financing statements, security agreements and other documents without the
  signature of Debtor either in Secured Party’s name or in the name of Debtor and
  as attorney-in-fact for Debtor. Debtor shall do all such additional and further
  acts or things, give such assurances and execute such documents or instruments
  as Secured Party reasonably requires to vest more completely in and assure to
  Secured Party its rights under this Security Agreement, including, without
  limiting the generality of the foregoing, (a) marking conspicuously each chattel
  paper or electronic chattel paper included in the Collateral and, at the request
  of Secured Party, each of Debtor’s records pertaining to the Collateral with a
  legend, in form and substance satisfactory to Secured Party, indicating that
  such chattel paper or Collateral is subject to the security interest granted by
  this Security Agreement and (b) if any Account, General Intangible or Related
  Right is evidenced by a promissory note, chattel paper, electronic chattel paper
  or other instrument, transferring, delivering, assigning to Secured Party such
  promissory note, chattel paper, electronic chattel paper or other instrument
  duly endorsed and authenticated and accompanied by duly executed instruments of
  transfer and assignment, all in form and substance reasonably satisfactory to
  Secured Party, to be held by Secured Party as Collateral under this Security
  Agreement. 

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          4.6      Filing
  Reproductions. At the option of Secured Party, a carbon, photographic or
  other reproduction of this Security Agreement or of a financing statement
  covering the Collateral shall be sufficient as a financing statement and may be
  filed as a financing statement. 

          4.7      Delivery of Information. Debtor will transmit promptly to Secured Party
  all information that Debtor may have or receive with respect to (a) the
  Collateral or (b) account debtors or obligors in respect of the Accounts, the
  General Intangibles and the Related Rights, in each case which could reasonably
  be expected to materially and adversely affect the aggregate value of the
  Collateral or Secured Party’s rights or remedies with respect thereto. 

          4.8      Compromise of Collateral. Debtor will not adjust, settle or compromise
  any of the Accounts, the General Intangibles or the Related Rights without the
  prior written consent of Secured Party, other than in a manner that does not
  materially affect the aggregate value of the Collateral and is in the ordinary
  course of business. 

          4.9      Expenses.
  Debtor agrees to pay to Secured Party at Secured Party’s offices, all advances,
  charges, costs and expenses (including reasonable attorneys’ fees and legal
  expenses) incurred by Secured Party in connection with the transaction which
  gives rise to this Security Agreement, in connection with confirming, perfecting
  and preserving the security interest created under this Security Agreement, in
  connection with protecting Secured Party against the claims or interests of any
  Person against the Collateral, and in exercising any right, power or remedy
  conferred by this Security Agreement or by law or in equity (including, but not
  limited to, reasonable attorneys’ fees and legal expenses incurred by Secured
  Party in the collection of instruments deposited with or purchased by Secured
  Party and amounts incurred in connection with the operation, maintenance or
  foreclosure of any or all of the Collateral). The amount of all such advances,
  charges, costs and expenses shall be due and payable by Debtor to Secured Party
  upon ten (10) days after invoice or demand by Secured Party together with
  interest thereon from the due date at the Default Rate as provided in the Credit
  Agreement. 

          4.10      Financing
  Statement Filings; Notifications. Debtor recognizes that financing
  statements pertaining to the Collateral will be filed with the Office of the
  Secretary of State of the State of Nevada. Debtor will promptly notify Secured
  Party of any condition or event that may change the proper location for the
  filing of any financing statements or other public notice or recordings for the
  purpose of perfecting a security interest in the Collateral. Without limiting
  the generality of the foregoing, Debtor will (a) promptly notify Secured Party
  of any change to a jurisdiction other than as represented in Section 3.5 or Section 3.6 (i) in the location of Debtor’s chief executive
  office or chief place of business; (ii) in the location of the Inventory
  (other than Inventory sold or leased in the ordinary course of business);
  (iii) in the location of the Equipment (other than Equipment removed in
  the ordinary course of business for not more than thirty (30) days) or disposed
  of as permitted by the Credit Agreement; (iv) in the location of the
  office where Debtor keeps its records concerning the Accounts; or (v) in
  the “location” of Debtor within the meaning of the Code; (b) prior to any of the
  Collateral becoming so related to any particular real estate so as to become a
  fixture on such real estate, notify Secured Party of the description of such
  real estate and the name of the record owner thereof; and (c) promptly notify
  Secured Party of any change in Debtor’s name, identity or limited liability
  company structure. In any notice furnished pursuant to this section, Debtor will
  expressly state that the notice is required by this Security Agreement and
  contains facts that will or may require additional filings 

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of financing statements or other notices for the purpose of
  continuing perfection of Secured Party’s security interest in the Collateral. 

          4.11      Maintenance
  of Collateral Generally. Except as otherwise provided in the Credit
  Agreement, (a) Debtor will maintain all the Collateral in good condition,
  repair, and working order (ordinary wear and tear excepted), and substantially
  in accordance with any manufacturer’s manual if applicable; (b) Debtor will not
  misuse, abuse, waste, destroy, endanger or allow the Collateral to deteriorate,
  except, with respect to the Equipment only, for ordinary wear and tear from its
  intended use; (c) Debtor will promptly, or in the case of any loss or damage to
  any goods included in the Collateral as soon as practicable, make or cause to be
  made all repairs, replacements or other improvements to the Collateral as are
  necessary or desirable to accomplish the foregoing; and (d) Debtor will not use
  any Collateral in violation of any law, statute, ordinance or regulation or
  allow it to be so used. 

          4.12      Account
  Obligations. The Debtor will duly perform or cause to be performed all
  obligations of Debtor with respect to the goods or services, the sale or lease
  or rendition of which gave rise or will give rise to each Account relating
  thereto. 

          4.13      Use of Inventory. If an Event of Default has occurred and is continuing,
  Debtor may use its Inventory in any lawful manner not inconsistent with this
  Security Agreement and with the terms of insurance thereon and may sell, lease
  or otherwise dispose of its Inventory in the ordinary course of business. Debtor
  will not and shall not be permitted to use any item of Inventory in a manner
  inconsistent with the holding thereof for sale, lease or disposition in the
  ordinary course of business or in contravention of the terms of any agreement. A
  sale, lease or disposition in the ordinary course of business does not include
  the exchange of items of Inventory for goods in kind or otherwise or transfers
  of items of Inventory made in satisfaction of present or future Secured
  Obligations. 

          4.14      Proceeds.
  Upon the terms and conditions set forth in the Credit Agreement and at the
  request of Secured Party, Debtor will deliver to Secured Party promptly upon
  receipt, all proceeds received by Debtor from the sale or disposition of the
  Collateral in the exact form in which they are received. To evidence Secured
  Party’s rights in this regard, Debtor will assign or endorse proceeds to Secured
  Party as Secured Party reasonably requests. Secured Party may, from time to
  time, in its discretion, hold non-cash proceeds as part of the Collateral or
  apply cash proceeds received by Secured Party in the manner set forth in Section 5.2 of this Security Agreement. Upon the terms and conditions set
  forth in the Credit Agreement and at the request of Secured Party, Debtor will
  notify obligors on all of the Collateral to make payments directly to Secured
  Party, and thereafter Secured Party may endorse as Debtor’s agent any checks,
  instruments, chattel paper or other documents connected with the Collateral,
  take control of proceeds of the Collateral and may hold the non-cash proceeds as
  part of the Collateral and may apply cash proceeds received by Secured Party in
  the manner set forth in Section 5.2 of this Security Agreement and may
  take any action necessary to obtain, preserve and enforce the Liens granted
  hereunder and maintain and preserve the Collateral. 

          4.15      Insurance.
  Debtor shall have and maintain, with financially sound and reputable insurers,
  insurance (subject to customary deductible and retention) satisfactory in all
  respects to Secured Party covering the goods included in the Collateral against
  such liabilities, risks and 

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contingencies, by such methods and in such amounts as provided
  in the Credit Agreement. Policies evidencing any such property insurance will
  name Secured Party as an additional insured and loss payee and provide for a
  minimum of thirty (30) days prior written notice to Secured Party of any
  cancellation. Debtor shall furnish Secured Party with certificates or other
  evidence of compliance with the foregoing insurance provisions as provided in
  the Credit Agreement. Secured Party may act as attorney-in-fact for Debtor and
  Debtor hereby irrevocably appoints Secured Party as Debtor’s true and lawful
  attorney-in-fact, with full power of substitution, in Secured Party’s name or
  Debtor’s name or otherwise, but at Debtor’s cost and expense and without notice
  to Debtor upon the occurrence and during the continuance of an Event of Default,
  to obtain, adjust, sell and cancel such insurance and endorse any draft drawn by
  insurers of the goods included in the Collateral. If any insurance policy
  covering the goods included in the Collateral expires or is canceled before the
  Secured Obligations are paid in full or before the termination of the Secured
  Party’s Commitment to make loans as provided in the Credit Agreement, at Secured
  Party’s option, Secured Party may, at Debtor’s expense, obtain replacement
  insurance which may, but need not, be single interest insurance in favor of
  Secured Party. 

          4.16      Collateral not to be Fixture or Accession. Debtor will not permit any
  Collateral to become so related to any particular real estate so as to become a
  fixture on such real estate or to be installed in or affixed to other goods so
  as to become an accession to such other goods unless such other goods are
  included in the Collateral; in the event that any Collateral is to become so
  related to any particular real estate or so installed or affixed to other goods,
  prior thereto Debtor will (a) notify Secured Party of such fact and (b) upon
  demand of Secured Party furnish written consents to Secured Party’s security
  interest and disclaimers of any interest in such Collateral signed by any Person
  having an interest in such real estate or such other goods, if applicable. 

          4.17      Delivery
  of Certificate of Title to Equipment. In the case of Equipment now owned
  constituting goods in which a security interest is perfected by a notation on
  the certificate of title or similar evidence of the ownership of such goods,
  Debtor shall, as soon as practicable after a request by Secured Party, deliver
  to Secured Party any and all certificates of title, applications for title or
  similar evidence of ownership of such Equipment and shall cause Secured Party to
  be named as lienholder on any such certificate of title or other evidence of
  ownership. In the case of such Equipment hereafter acquired, Debtor shall
  provide evidence of ownership within ten (10) days of its acquisition of such
  Equipment. Debtor shall provide notice to Secured Party of any material loss or
  damage to any Equipment and shall not permit any such Equipment to become a
  fixture to real estate or an accession to other personal property other than as
  permitted in the Credit Agreement. 

          4.18      Third-Party Acknowledgments; Control Agreements. If any of the Collateral
  is in the possession of a third-party, Debtor will join with Secured Party in
  notifying the third-party of Secured Party’s security interest and obtaining an
  acknowledgment in form and substance reasonably satisfactory to Secured Party
  from such third-party that it is holding the Collateral for the benefit of the
  Secured Party. Debtor will fully cooperate with Secured Party in obtaining a
  control agreement in form and substance reasonably satisfactory to Secured Party
  with respect to any Collateral consisting of deposit accounts, investment
  property, electronic chattel paper or letter of credit rights. 

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ARTICLE V 

  RIGHTS, REMEDIES AND DEFAULT 

          5.1      With Respect to Collateral. Secured Party is hereby fully authorized and
  empowered (without the necessity of any further consent or authorization from
  Debtor) and the right is expressly granted to Secured Party, and Debtor hereby
  constitutes, appoints and makes Secured Party as Debtor’s true and lawful
  attorney-in-fact and agent for Debtor and in Debtor’s name, place and stead with
  full power of substitution, in Secured Party’s name or Debtor’s name or
  otherwise, for Secured Party’s sole use and benefit, but at Debtor’s cost and
  expense, to exercise, without notice, all or any of the following powers at any
  time following the occurrence and during the continuation of an Event of Default
  hereunder with respect to all or any of the Collateral: 

          (a)      notify
  account debtors or the obligors on the Accounts, the General Intangibles and the
  Related Rights to make and deliver payment to Secured Party; 

          (b)     
  to demand, sue for, collect, receive and give acquittance for any and all monies
  due or to become due by virtue thereof and otherwise deal with proceeds; 

          (c)      to
  receive, take, endorse, assign and deliver any and all checks, notes, drafts,
  documents and other negotiable and non-negotiable instruments and chattel paper
  taken or received by Secured Party in connection therewith; 

          (d)      to
  settle, compromise, compound, prosecute or defend any action or proceeding with
  respect thereto; 

          (e)     
  to sell, transfer, assign or otherwise deal in or with the same or the proceeds
  or avails thereof or the relative goods, as fully and effectively as if Secured
  Party were the absolute owner thereof; and 

          (f)     
  to extend the time of payment of any or all thereof and to grant waivers and
  make any allowance or other adjustment with reference thereto; provided, however, Secured Party shall be under no obligation or duty to exercise
  any of the powers hereby conferred upon it and shall be without liability for
  any act or failure to act in connection with the collection of, or the
  preservation of any rights under, any Collateral. 

          5.2      Application
  of Cash Sums. All cash sums paid to and received by Secured Party on account
  of the Collateral will be (a) released to Debtor for use in Debtor’s business
  or, at the option of Secured Party pursuant to the terms and conditions of the
  Credit Agreement, (b) applied by Secured Party on the Secured Obligations
  whether or not such Secured Obligations shall have by its terms matured, in
  accordance with the Credit Agreement; provided, however, Secured
  Party need not apply or give credit for any item included in such sums until
  Secured Party has received final payment thereof at its banking quarters or
  solvent credits accepted as such by Secured Party; and provided further that Secured Party’s failure to so apply any such sums shall not
  be a waiver of Secured Party’s right to so apply such sums or any other sums at
  any time. 

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          5.3      Events of Default. An “Event of Default” under this Security
  Agreement shall occur upon the occurrence of an “Event of Default” under the
  Credit Agreement. 

          5.4      Default Remedies. Upon the occurrence and during the continuation of any
  Event of Default, Secured Party may then, or at any time thereafter and from
  time to time after giving any notice required under the Credit Agreement, if any
  notice is required with respect to such Event of Default, apply, set-off,
  collect, sell in one or more sales, lease, or otherwise dispose of, any or all
  of the Collateral, in its then condition or, at Secured Party’s option,
  following any commercially reasonable preparation or processing, in such order
  as Secured Party may elect, and any such sale may be made either at public or
  private sale at its place of business or elsewhere, or at any brokers’ board or
  securities exchange, either for cash or upon credit or for future delivery, and
  Secured Party may be the purchaser of any or all Collateral so sold and may hold
  the same thereafter in its own right free from any claim of Debtor or right of
  redemption. No such purchase or holding by Secured Party shall be deemed a
  retention by Secured Party in satisfaction of the Secured Obligations. All
  demands, notices and advertisements, and the presentment of property at sale are
  hereby waived except to the extent reasonably necessary to conduct a
  commercially reasonable sale. If, notwithstanding the foregoing provisions, any
  applicable provision of the Code or other law requires Secured Party to give
  reasonable notice of any such sale or disposition or other action, Debtor hereby
  agrees ten (10) days prior written notice shall constitute reasonable notice.
  Secured Party may require Debtor to assemble the Collateral and make it
  available to Secured Party at a place designated by Secured Party which is
  reasonably convenient to Secured Party and Debtor. Any sale hereunder may be
  conducted by an auctioneer or any officer or agent of Secured Party. 

          5.5      Proceeds.
  Upon the occurrence of any Event of Default, the proceeds of any sale or other
  disposition of the Collateral and all sums received or collected by Secured
  Party from or on account of the Collateral shall be applied by Secured Party in
  the manner set forth in the Code. 

          5.6      Deficiency.
  Debtor shall remain liable to Secured Party for any unpaid Secured Obligations,
  advances, costs, charges and expenses, together with interest thereon and shall
  pay the same immediately to Secured Party as set forth in the Credit Agreement. 

          5.7      Secured Party’s Duties. The powers conferred upon Secured Party by this
  Security Agreement are solely to protect the interest of Secured Party in the
  Collateral and shall not impose any duty upon Secured Party to exercise any such
  powers. Secured Party shall be under no duty whatsoever to make or give any
  presentment, demand for performance, notice of nonperformance, protest, notice
  of protest, notice of dishonor, or other notice or demand in connection with any
  Collateral or the Secured Obligations, or to take any steps necessary to
  preserve any rights against prior parties. Secured Party shall not be liable for
  failure to collect or realize upon any or all of the Secured Obligations or
  Collateral, or for any delay in so doing, nor shall Secured Party be under any
  duty to take any action whatsoever with regard thereto. Secured Party shall use
  reasonable care in the custody and preservation of any Collateral in its
  possession but need not take any steps to keep the Collateral identifiable.
  Secured Party shall have no duty to comply with any recording, filing, or other
  legal requirements necessary to establish or maintain the validity, priority or
  enforceability of, or Secured Party’s rights in or to, any of the Collateral. 

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          5.8      Secured Party’s Actions. Debtor waives any right to require Secured Party
  to proceed against any Person, exhaust any Collateral, or have any Other Liable
  Party joined with Debtor in any suit arising out of the Secured Obligations or
  this Security Agreement or pursue any other remedy in Secured Party’s power;
  waives any and all notice of acceptance of this Security Agreement or of
  creation, modification, rearrangement, renewal or extension for any period of
  any of the Secured Obligations from time to time; and waives any defense arising
  by reason of any disability or other defense of any Other Liable Party, or by
  reason of the cessation from any cause whatsoever of the liability of any Other
  Liable Party. All dealings between Debtor and Secured Party, whether or not
  resulting in the creation of the Secured Obligations, shall conclusively be
  presumed to have been had or consummated in reliance upon this Security
  Agreement. Until all the Secured Obligations shall have been paid in full (other
  than indemnity obligations and similar obligations that survive the termination
  of the Loan Documents for which no notice of a claim has been received by
  Debtor), Debtor shall have no right to subrogation, and Debtor waives until all
  the Secured Obligations shall have been paid in full (other than indemnity
  obligations and similar obligations that survive the termination of the Loan
  Documents for which no notice of a claim has been received by Debtor) any right
  to enforce any remedy which Secured Party now has or may hereafter have against
  Other Liable Party and waives any benefit of and any right to participate in any
  Collateral or security whatsoever now or hereafter held by Secured Party. Debtor
  authorizes Secured Party, without notice or demand and without any reservation
  of rights against Debtor and without affecting Debtor’s liability hereunder or
  on the Secured Obligations, from time to time to (a) take and hold any other
  property as collateral, other than the Collateral, for the payment of any or all
  of the Secured Obligations, and exchange, enforce, waive and release any or all
  of the Collateral or such other property; (b) apply the Collateral or such other
  property and direct the order or manner of sale thereof as Secured Party in its
  discretion may determine; (c) renew, extend for any period, accelerate, modify,
  compromise, settle or release the obligation of any Other Liable Party with
  respect to any or all of the Secured Obligations or Collateral; (d) waive,
  enforce, modify, amend or supplement any of the provisions of any of the
  Security Documents, the Credit Agreement or the Promissory Note or any other
  promissory note or document evidencing any of the Secured Obligations (except
  for an amendment or supplement to any of the foregoing to which Debtor is a
  party to the extent such amendment or supplement requires the consent of
  Debtor); and (e) release or substitute any Other Liable Party. 

          5.9      Transfer of Secured Obligations and Collateral. Secured Party may
  transfer any or all of Secured Party’s interest in the Secured Obligations, and
  upon any such transfer Secured Party may transfer any or all of the Collateral
  and shall be fully discharged thereafter from all liability with respect to the
  Collateral so transferred, and the transferee shall be vested with all rights,
  powers and remedies of Secured Party hereunder with respect to Collateral so
  transferred; provided, however, with respect to any Collateral not
  so transferred, Secured Party shall retain all rights, powers and remedies
  provided under this Security Agreement. Secured Party may at any time deliver
  any or all of the Collateral to Debtor whose receipt shall be a complete and
  full acquittance for the Collateral so delivered, and Secured Party shall
  thereafter be discharged from any liability therefor. 

          5.10      Cumulative
  Security. The execution and delivery of this Security Agreement in no manner
  shall impair or affect any other security (by endorsement or otherwise) for the
  Secured Obligations. No security taken hereafter as security for the Secured
  Obligations shall 

12 




impair in any manner or affect this Security Agreement. All
  such present and future additional security is to be considered as cumulative
  security. 

          5.11      Continuing Agreement. This is a continuing Security Agreement and the
  grant of a security interest hereunder shall remain in full force and effect and
  all the rights, powers and remedies of Secured Party hereunder shall continue to
  exist until (a) the Secured Obligations are paid in full (other than indemnity
  obligations and similar obligations that survive the termination of the Loan
  Documents for which no notice of a claim has been received by Debtor), (b)
  Secured Party has no further obligation to advance monies to Debtor under the
  Credit Agreement and (c) Secured Party, upon written request of Debtor, has
  executed a written termination statement, reassigned to Debtor, without
  recourse, the Collateral and all rights conveyed hereby and returned possession
  of the Collateral to Debtor. Furthermore, it is contemplated by the parties
  hereto that there may be times when no Secured Obligations are owing;
  notwithstanding such occurrences, however, this Security Agreement shall remain
  valid and shall be in full force and effect as to subsequent Secured Obligations
  provided Secured Party has not executed a written termination statement and
  returned possession of the Collateral to Debtor. Otherwise this Security
  Agreement shall continue irrespective of the fact that the liability of any
  Other Liable Party may have ceased, or irrespective of the validity or
  enforceability of the Promissory Note or any of the Security Documents,
  including the Credit Agreement, to which any Other Liable Party may be a party,
  and notwithstanding the reorganization, death, incapacity or bankruptcy of any
  Other Liable Party, and notwithstanding the reorganization or bankruptcy of
  Debtor, or any other event or proceeding affecting Debtor or any Other Liable
  Party. 

          5.12      Cumulative
  Rights. The rights, powers and remedies of Secured Party hereunder shall be
  in addition to all rights, powers and remedies given by statute or rule of law
  and are cumulative. The exercise of any one or more of the rights, powers and
  remedies provided herein shall not be construed as a waiver of any other rights,
  powers and remedies of Secured Party. Furthermore, regardless of whether or not
  the Uniform Commercial Code is in effect in the jurisdiction where such rights,
  powers and remedies are asserted, Secured Party shall have the rights, powers
  and remedies of a secured party under the Code. Secured Party may exercise its
  bankers’ Lien or right of set-off with respect to the Secured Obligations in the
  same manner as if the Secured Obligations were unsecured. 

          5.13      Exercise
  of Rights, Etc. Time shall be of the essence for the performance of any act
  under this Security Agreement or the Secured Obligations by Debtor or Other
  Liable Party, but neither Secured Party’s acceptance of partial or delinquent
  payments nor any forbearance, failure or delay by Secured Party in exercising
  any right, power or remedy shall be deemed a waiver of any obligation of Debtor
  or of Other Liable Party or of any right, power or remedy of Secured Party or
  preclude any other or further exercise thereof; and no single or partial
  exercise of any right, power or remedy shall preclude any other or further
  exercise thereof, or the exercise of any other right, power or remedy. 

          5.14      Remedy
  and Waiver. Secured Party may remedy any Default or Event of Default without
  waiving the Default or Event of Default or waiving any prior or subsequent
  Default or Event of Default. 

13 




          5.15      Non-Judicial Remedies. Secured Party may enforce its rights hereunder
  without prior judicial process or judicial hearing, and Debtor expressly waives,
  renounces and knowingly relinquishes any and all legal rights which might
  otherwise require Secured Party to enforce its rights by judicial process. In so
  providing for non-judicial remedies, Debtor recognizes and concedes that such
  remedies are consistent with the usage of the trade, are responsive to
  commercial necessity, and are the result of bargain at arm’s length. Nothing
  herein is intended to prevent Secured Party or Debtor from resorting to judicial
  process at any party’s option. 

          5.16      Compliance with Other Laws. Secured Party may comply with the
  requirements of any applicable state or federal law in connection with the
  disposition of all or any part of the Collateral, and compliance with such laws
  will not be considered to adversely affect the commercial reasonableness of any
  sale of all or any part of the Collateral. 

          5.17      Disclaimer of Warranties. Secured Party may sell the Collateral without
  giving any warranties as to the Collateral. Secured Party may specifically
  disclaim any warranties of title or similar warranties. The disclaimer of any
  such warranties will not be considered to adversely affect the commercial
  reasonableness of any sale of all or any part of the Collateral. 

          5.18      Sales on Credit. If Secured Party sells all or any part of the Collateral
  upon credit, Debtor will be credited only with payments actually made by the
  purchaser, received by the Secured Party and applied against the Secured
  Obligations. In the event the purchaser fails to pay for the Collateral, Secured
  Party may resell the Collateral and Debtor shall be credited with the proceeds
  of such sale. 

ARTICLE VI 

  MISCELLANEOUS 

          6.1      Preservation of Liability. Neither this Security Agreement nor the
  exercise by Secured Party of (or the failure to so exercise) any right, power or
  remedy conferred herein or by law shall be construed as relieving any Person
  liable on the Secured Obligations from liability on the Secured Obligations and
  for any deficiency thereon. 

          6.2      Notices. Any record, notice, demand or document which either party is
  required or may desire to give hereunder shall be given as provided in the
  Credit Agreement.

          6.3      Choice
  of Law. THIS SECURITY AGREEMENT HAS BEEN MADE IN AND THE SECURITY INTEREST
  GRANTED HEREBY IS GRANTED IN AND EACH SHALL BE GOVERNED BY THE LAWS OF THE STATE
  OF TEXAS (EXCEPT TO THE EXTENT THAT THE LAWS OF ANY OTHER JURISDICTION GOVERN
  THE PERFECTION AND PRIORITY OF THE SECURITY INTEREST GRANTED HEREBY) WITHOUT
  REGARD TO ITS CONFLICTS OF LAWS PRINCIPLES. 

          6.4      Amendment
  and Waiver. This Security Agreement may not be amended (nor may any of its
  terms be waived) except in the manner provided in the Credit Agreement. 

          6.5      Severability.
  If any provision of this Security Agreement is rendered or declared invalid,
  illegal or unenforceable by reason of any existing or subsequently enacted
  legislation or by a judicial decision which shall have become final, Debtor and
  Secured Party shall promptly 

14 




meet and discuss substitute provisions for those rendered
  invalid, illegal or unenforceable, but all of the remaining provisions shall
  remain in full force and effect 

          6.6      Survival
  of Agreements. All representations and warranties of Debtor herein, and all
  covenants and agreements herein not fully performed before the effective date of
  this Security Agreement, shall survive such date. 

          6.7      Counterparts. This Agreement may be executed in two or more counterparts,
  and it shall not be necessary that the signatures of all parties hereto be
  contained on any one counterpart hereof. Each counterpart shall be deemed an
  original, but all such counterparts taken together shall constitute one and the
  same instrument.

          6.8      Successors and Assigns. The covenants and agreements herein contained by
  or on behalf of Debtor shall bind Debtor, Debtor’s legal representatives,
  successors and assigns and all persons who become bound as a debtor to this
  Security Agreement and shall inure to the benefit of Secured Party, its
  successors and permitted assigns under the Credit Agreement. 

          6.9      Titles
  of Articles, Sections and Subsections. All titles or headings to articles,
  sections, subsections or other divisions of this Security Agreement are only for
  the convenience of the parties and shall not be construed to have any effect or
  meaning with respect to the other content of such articles, sections,
  subsections or other divisions, such other content being controlling as to the
  agreement between the parties hereto. 

          6.10      WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, EACH
  OF THE UNDERSIGNED HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY
  RIGHT WHICH IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY
  OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THE
  PROMISSORY NOTE, THIS AGREEMENT OR THE OTHER SECURITY DOCUMENTS, OR ANY
  TRANSACTION CONTEMPLATED THEREBY, BEFORE OR AFTER MATURITY. 

          6.11      Interest. It is the intention of the parties hereto to comply strictly to
  usury laws applicable to the Secured Party. Interest on the Debt is expressly
  limited so that in no contingency or event whatsoever, whether by acceleration
  of the maturity of the Promissory Note or otherwise, shall the interest taken,
  reserved, contracted for, charged or received by the Secured Party exceed the
  maximum amount permissible under applicable law. If from any circumstances
  whatsoever fulfillment of any provisions of the Credit Agreement, this
  Agreement, any of the other Security Documents or of any other document
  evidencing, securing or pertaining to the Debt evidenced by the Promissory Note,
  at the time performance of such provision shall be due, would be usurious under
  applicable law, then, ipso facto, the obligation to be fulfilled shall be
  reduced to the limit of such validity so that the aggregate consideration which
  constitutes interest that is contracted for, taken, reserved, charged for, or
  received shall not exceed the maximum amount allowed by applicable law and such
  amount that would otherwise be excessive interest shall be applied to the
  reduction of the principal amount owing under the Promissory Note or on account
  of any other Debt of the Debtor to the Secured Party, or if principal of the
  Promissory Note and such other Debt has been paid in full, refunded to the
  Debtor. In determining whether 

15 




or not the interest paid or agreed to be paid for the use,
  forbearance, or detention of sums hereunder exceeds the highest lawful rate, the
  Debtor and the Secured Party shall, to the maximum extent permitted by
  applicable law, (a) characterize any non-principal payment as an expense, fee or
  premium rather than as interest, (b) exclude voluntary prepayments and the
  effects thereof, (c) amortize, prorate, allocate and spread the total amount of
  interest throughout the full term of such Debt so that the actual rate of
  interest on account of such Debt does not exceed the highest lawful rate, and/or
  (d) allocate interest between portions of such Debt, to the end that no such
  portion shall bear interest at a rate greater than that permitted by applicable
  law. 

          THIS
  SECURITY AGREEMENT, THE CREDIT AGREEMENT, THE PROMISSORY NOTE AND THE SECURITY
  DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE
  MATTERS ADDRESSED HEREIN AND THEREIN AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
  PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
  NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 

[SIGNATURES BEGIN ON THE FOLLOWING PAGE]

16 




          IN
  WITNESS WHEREOF, the undersigned have caused this instrument to be executed by
  its duly authorized undersigned officers effective as of July ___, 2008. 

DEBTOR: 

DORAL ENERGY CORP., 

  a Nevada corporation 

	 	By:	
	 	 	Paul Kirkitelos 
	 	 	President & CEO 


SIGNATURE PAGE TO SECURITY AGREEMENT 




          IN
  WITNESS WHEREOF, the undersigned have caused this instrument to be executed by
  its duly authorized undersigned officers effective as of July ___, 2008. 

SECURED PARTY: 

MACQUARIE BANK LIMITED, 

  a bank incorporated under the laws of Australia 

	 	By: 	 
	 	Name: 	 
	 	Title: 	 
	 	 	 
	 	 	 
	 	By: 	 
	 	Name: 	 
	 	Title: 	 


SIGNATURE PAGE TO SECURITY AGREEMENT 



EXHIBIT G 

Form of Subordination Agreement 

See attached. 




SUBORDINATION AGREEMENT 

[FORM OF] 

          This
  SUBORDINATION AGREEMENT (as amended or modified, the “Subordination Agreement”) is by and among [Insert name of subordinated creditor]
    [Insert organizational information] (“Subordinated Creditor”, whether
  one or more), whose address is [__________________________], DORAL ENERGY
  CORP., a Nevada corporation (“Borrower”), whose address is 111 Sepulveda
  Blvd., Suite 250, Manhattan Beach, California 90266 and MACQUARIE BANK LIMITED,
  a bank incorporated under the laws of Australia (“Administrative Agent”),
  with offices at Level 15, 1 Martin Place, Sydney, New South Wales, 2000
  Australia. 

Background 

          1.     
  Borrower, Administrative Agent and each of the Lenders (as defined in the Credit
  Agreement) are parties to the Senior First Lien Secured Credit Agreement dated
  as of July ___, 2008 (as amended, supplemented or modified from time to time,
  the “Credit Agreement”). Borrower’s obligations to each of the Lenders
  under the Credit Agreement are secured by a senior mortgage lien and
  first-priority security interest conveying all of the real and personal property
  of Borrower. 

          2.      Each
  of Lenders’ obligations under the Credit Agreement is conditioned upon, among
  other things, the subordination of all obligations owed by Borrower to the
  Subordinated Creditor to the obligations owed by Borrower to Lenders under the
  Credit Agreement and the other Loan Documents (as defined in the Credit
  Agreement). 

          3.      Capitalized
  terms not defined in this Subordination Agreement shall have the meanings set
  forth in the Credit Agreement. 

Agreements 

          To
  comply with the terms and conditions of the Credit Agreement and for other good
  and valuable consideration, the receipt and sufficiency of which are
  acknowledged by the parties, the Subordinated Creditor, Borrower and Lenders
  agree as follows: 

          Section
  1.      Subordination of Obligations and
    Priority. 

                         (a)      The
  payment of and any liens or security interests securing payment of any and all
  Subordinated Debt (defined below) is expressly subordinated to the extent and in
  the manner set forth in this Subordination Agreement to the Senior Indebtedness
  (defined below) and the liens and security interests securing the Senior
  Indebtedness. The term “Subordinated Debt” as used in this
  Subordination Agreement means any and all indebtedness, liabilities and
  obligations of Borrower to the Subordinated Creditor, absolute or contingent,
  direct or indirect, joint, several or independent, now outstanding or owing or
  which may hereafter be existing or incurred, arising by operation of law or
  otherwise, due or to become due, or held or to be held by the Subordinated
  Creditor, whether created directly or acquired by assignment, as a
  participation, conditionally, as collateral security from another or otherwise,
  including indebtedness, 




obligations and liabilities of Borrower to Subordinated
  Creditor as a member of any partnership, syndicate, association or other group,
  and whether incurred by Borrower as principal, surety, endorser, guarantor,
  accommodation party or otherwise, including, without limiting the generality of
  the foregoing, all indebtedness, liabilities and obligations of Borrower to the
  Subordinated Creditor arising out of any operating agreement or similar
  agreement between Subordinated Creditor and Borrower. 

                         The
  term “Senior Indebtedness” as used in this Subordination Agreement means
  any and all indebtedness, liabilities and other Obligations of Borrower to
  Senior Creditor (as defined below) absolute or contingent, direct or indirect,
  joint, several or independent, now outstanding or owing or which may hereafter
  be existing or incurred, arising by operation of law or otherwise, due or to
  become due, or held or to be held by Senior Creditor whether created directly or
  acquired by assignment, as a participation, conditionally, as collateral
  security from another or otherwise, including indebtedness, obligations and
  liabilities of Borrower to Senior Creditor as a member of any partnership,
  syndicate, association or other group, and whether incurred by Borrower as
  principal, surety, endorser, guarantor, accommodation party or otherwise and
  including, without limitation, all Obligations (as defined in the Credit
  Agreement) owed by Borrower to Senior Creditor under the Credit Agreement, the
  Swap Agreement and the other Loan Documents. 

                         (b)      Priority.
  The agreements of Borrower, Senior Creditor and Subordinated Creditor herein are
  applicable without regard to the date a loan or extension of credit is made to
  Borrower. The term “Senior Creditor” includes Administrative Agent, each
  of the Lenders party to the Credit Agreement and Macquarie Bank Limited under
  the Swap Agreement. 

          Section
  2.      Restrictions on Subordinated
    Creditor. During such time as any Senior Indebtedness remains unpaid,
  Subordinated Creditor will not ask for, demand, sue for, take, receive or accept
  from the Borrower, by set off or in any other manner, any payment or
  distribution on account of the Subordinated Debt, nor present any instrument
  evidencing the Subordinated Debt for payment (other than such presentment as may
  be necessary to prevent discharge of other liable parties on such instrument); [provided, however, nothing contained herein shall
  prevent Subordinated Creditor from (a) receiving any scheduled payment from
  Borrower pursuant to the instruments set forth on Exhibit A (the
  “Subordinated Debt Instruments”) and (b) receiving payment from
  Borrower for goods and services provided to Borrower by Subordinated Creditor in
  the ordinary course of business within thirty (30) days of the date hereof or
  after the date hereof.] 

          Section
  3.      Prohibition of All Payments Following
    Default and Notice. 

                         (a)     
  If there shall occur and be continuing any Event of Default, then, unless and
  until such Event of Default shall have been cured, or unless and until the
  Senior Indebtedness shall be paid in full, the Subordinated Creditor will not
  ask for, sue for, take, demand, receive or accept from Borrower, by set off or
  in any other manner, any payment or distribution on account of the Subordinated
  Debt nor present any Subordinated Debt Instrument or any instrument evidencing
  the Subordinated Debt for payment (other than such presentment as may be
  necessary to prevent discharge of other liable parties on such instrument). 

2




                         (b)     
  In the event that Borrower defaults under the Subordinated Debt prior to the
  full and final payment of the Senior Indebtedness, Borrower shall provide Lender
  with notice of such default. 

          Section
  4.      Payments Cannot Create a Default.
  The Subordinated Creditor will not ask for, demand, sue for, take, receive or
  accept from Borrower, by set off or in any other manner, any payment or
  distribution on account of the Subordinated Debt, if the making of such payment
  would constitute, or would result in the occurrence of, a violation of the
  provisions of any instrument or agreement evidencing, in connection with, as
  security for or providing for the issuance of any Senior Indebtedness or would
  result in the occurrence of any event which with the giving of notice or lapse
  of time or both would constitute a default or an event of default under the
  Credit Agreement or any other Loan Document. 

          Section
  5.      Unauthorized Receipt of Payment by
    Subordinated Creditor. In the event the Subordinated Creditor shall receive
  any payment or distribution on account of the Subordinated Debt which
  Subordinated Creditor is not entitled to receive under this Subordination
  Agreement, Subordinated Creditor will hold any amount so received in trust for
  Senior Creditor and will promptly turn over such payment to Senior Creditor in
  the form received by Subordinated Creditor (together with any necessary
  endorsement) to be applied against the Senior Indebtedness. 

          Section
  6.      Restrictions on Actions to Recover
    Subordinated Debt. The Subordinated Creditor will not commence any action or
  proceeding against Borrower to recover all or any part of the Subordinated Debt
  or join with any other creditor, unless Senior Creditor shall also join, in
  bringing any proceedings against Borrower under any bankruptcy, reorganization,
  readjustment of debt, arrangement of debt, receivership, liquidation or
  insolvency law or statute of the Federal or any state government unless and
  until all Senior Indebtedness shall have been paid in full. 

          Section
  7.      Insolvency or Bankruptcy by Borrower. In
  the event of any receivership, insolvency, bankruptcy, assignment for the
  benefit of creditors, reorganization or arrangement with creditors, adjustment
  of debt, whether or not pursuant to bankruptcy laws, the sale of all or
  substantially all of the assets, dissolution, liquidation, or any other
  marshaling of the assets and liabilities of Borrower, the Subordinated Creditor
  will at Senior Creditor’s request file any claim, proof of claim, proof of
  interest or other instrument of similar character necessary to enforce the
  obligations of Borrower in respect of the Subordinated Debt and will hold in
  trust for Senior Creditor and pay over to Senior Creditor, in the form received
  (together with any necessary endorsement), to be applied on the Senior
  Indebtedness, any and all monies, dividends or other assets received in any such
  proceedings on account of the Subordinated Debt unless and until the Senior
  Indebtedness shall be paid in full. In the event that the Subordinated Creditor
  shall fail to take any such action requested by Senior Creditor, Senior
  Creditor, may, as attorney in fact for the Subordinated Creditor take such
  action on behalf of the Subordinated Creditor, and the Subordinated Creditor
  hereby appoints Senior Creditor as attorney in fact for the Subordinated
  Creditor to demand, sue for, collect and receive any and all such monies,
  dividends or other assets and give acquittance therefor and to file any claim,
  proof of claim, proof of interest or other instrument of similar character and
  to take such other proceedings in Senior Creditor’s own name or in the name of
  the Subordinated Creditor as Senior Creditor may deem necessary or advisable for
  the enforcement of this Subordination Agreement, and the Subordinated Creditor 

3




will execute and deliver to Senior Creditor such other and
  further powers of attorney or other instruments as Senior Creditor may request
  in order to accomplish the foregoing. 

          Section
  8.      Senior Creditor’s Rights. Senior
  Creditor may, at any time, and from time to time, without the consent of or
  notice to the Subordinated Creditor, without incurring responsibility to the
  Subordinated Creditor and without impairing or releasing any of Senior
  Creditor’s rights or any of the obligations of the Subordinated Creditor under
  this Subordination Agreement: 

                         (a)     
  change the amount of the Senior Indebtedness, manner, place or terms of payment,
  or change or extend for any period the time of payment of, or renew, rearrange
  or otherwise modify or alter, the Senior Indebtedness or any instrument or
  agreement now or hereafter executed evidencing, in connection with, as security
  for or providing for the issuance of any of the Senior Indebtedness in any
  manner, or enter into or amend in any manner any other agreement relating to the
  Senior Indebtedness (including provisions restricting or further restricting
  payments of the Subordinated Debt); 

                         (b)      sell,
  exchange, release or otherwise deal with all or any part of any property by
  whomsoever at any time pledged or mortgaged to secure, howsoever securing, the
  Senior Indebtedness in accordance with the applicable Loan Documents; 

                         (c)      release
  anyone liable in any manner for payment or collection of the Senior
  Indebtedness; 

                         (d)     
  exercise or refrain from exercising any rights against Borrower or others
  (including the Subordinated Creditor); and 

                         (e)      apply
  any sums received by Senior Creditor, by whomsoever paid and however realized,
  to payment of the Senior Indebtedness in such a manner as Senior Creditor, in
  its sole discretion, may deem appropriate. 

          Section
  9.      Documentation of Subordinated Debt. The
  Subordinated Creditor will: 

                         (a)      cause
  all Subordinated Debt to be evidenced by a note, debenture or other instrument
  evidencing the Subordinated Debt; 

                         (b)     
  at Senior Creditor’s request, promptly surrender or cause to be surrendered any
  such note, debenture, or instrument evidencing the Subordinated Debt so that a
  statement or legend may be entered thereon to the effect that such note,
  debenture, or other instrument is subordinated to the Senior Indebtedness in
  favor of Senior Creditor in the manner and to the extent set forth in this
  Subordination Agreement; 

                         (c)      mark
  the books of Subordinated Creditor to show that the Subordinated Debt is
  subordinated to the Senior Indebtedness in the manner and to the extent set
  forth in this Subordination Agreement; and 

4




                         (d)      cause
  all financial statements of the Subordinated Creditor hereafter prepared for
  delivery to any person to make specific reference to the provisions of this
  Subordination Agreement. 

          Section
  10.      Notices. All notices and other
  communications provided for hereunder shall be in writing (including by
  facsimile transmission). All such written notices shall be mailed, faxed or
  delivered, to the applicable address, or facsimile number set out below or to
  such other address, or facsimile number, as shall be designated by such party in
  a notice to the other parties. All such notices and other communications shall
  be deemed to be given or made upon the earlier to occur of (a) actual receipt by
  the relevant party hereto and (b) (i) if delivered by hand or by courier,
  upon delivery; (ii) if delivered by mail, four Business Days after
  deposit in the mails, postage prepaid; and (iii) if delivered by
  facsimile, when sent and the sender has received electronic confirmation of
  error free receipt. In no event shall a voicemail message be effective as a
  notice, communication or confirmation hereunder. 

	 	If to Administrative Agent: 	 	Macquarie Bank Limited 	 	 	 	 
	 	 	 	Houston Representative Office 	 	 	 	 
	 		 	One Allen Center	 	 	 	 
	 	 	 	500 Dallas Street, Suite 3100 	 	 	 	 
	 	 	 	Houston, Texas 77002 	 	 	 	 
	 	 	 	Attention: 	 	 	Michael Sextro 	 
	 	 	 	Telephone: 	 	 	713-275-6207 	 
	 	 	 	Facsimile: 	 	 	713-275-6222 	 
	 	 	 	E-Mail: 	 	 	michael.sextro@macquarie.com 	 
	 	 	 	 	 	 	 	 
	 	With a copy to: 	 	Greenberg Traurig, LLP 	 	 	 	 
	 	 	 	1000 Louisiana, Suite 1700 	 	 	 	 
	 	 	 	Houston, Texas 77002 	 	 	 	 
	 	 	 	Attention: 	 	 	Douglas C. Atnipp 	 
	 	 	 	Telephone: 	 	 	713-374-3500 	 
	 	 	 	Facsimile: 	 	 	713-374-3505 	 
	 	 	 	E-Mail: 	 	 	atnippd@gtlaw.com 	 
	 	 	 	 	 	 	 	 
	 	[If to Subordinated Creditor: 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 
	 	 	 	Attention: 	 	 	 	 
	 	 	 	Telephone: 	 	 	 	 
	 	 	 	Facsimile: 	 	 	 	 
	 	 	 	E-Mail: 	 	 	 	] 
	 	 	 	 	 	 	 	 
	 	[With a copy to: 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 
	 	 	 	Attention: 	 	 	 	 
	 	 	 	Telephone: 	 	 	 	 


5





	 	 	 	Facsimile: 	 	 	 	 
	 	 	 	E-Mail: 	 	 	 	 ]
	 	 	 	 	 	 	 	 
	 	If to Borrower: 	 	Doral Energy Corp 	 	 	 	 
	 	 	 	111 N. Sepulveda Blvd. 	 	 	 	 
	 	 	 	Suite 250 	 	 	 	 
	 	 	 	Manhattan Beach, CA 90266 	 	 	 	 
	 	 	 	Attention: 	 	 	 	 
	 	 	 	Telephone: 	 	 	 	 
	 	 	 	Facsimile: 	 	 	 	 
	 	 	 	E-Mail: 	 	 	 	 


          Section
  11.      Execution of Instruments. The
  Subordinated Creditor agrees to execute any and all other instruments necessary
  as required by the Lender to subordinate the Subordinated Debt to the Senior
  Indebtedness as herein provided. 

          Section
  12.      Assignment by Subordinated
    Creditor. Subordinated Creditor will not assign or transfer to others any
  claim the Subordinated Creditor has or may have against Borrower as long as any
  of the Senior Indebtedness remains outstanding, unless such assignment or
  transfer is expressly made subject to this Subordination Agreement. 

          Section
  13.      Warranties and Representations.
  The Subordinated Creditor represents and warrants that (a) neither the execution
  nor delivery of this Subordination Agreement nor fulfillment of or compliance
  with the terms and provisions hereof will conflict with, or result in a breach
  of the terms, conditions or provisions of, or constitute a default under, any
  agreement or instrument (including, without limitation, any formation documents)
  to which Subordinated Creditor is now subject, (b) none of the Subordinated Debt
  is or will be subordinated to any other indebtedness of Borrower other than the
  Senior Indebtedness unless otherwise agreed by Lender, (c) except for the
  Subordinated Debt evidenced by the Subordinated Debt Instruments, as of the date
  of this Agreement, Borrower has no additional debt due and owing to Subordinated
  Creditors and (d) Exhibit B contains a listing of all liens filed by
  Subordinated Creditor relating to the Subordinated Debt. 

          Section
  14.      Waiver of Notice of Acceptance.
  Notice of acceptance of this Subordination Agreement is waived, acceptance on
  the part of Lender being conclusively presumed by its request for this
  Subordination Agreement and delivery of the same to it. 

          Section
  15.      Assignment by Lender. This
  Subordination Agreement may be assigned by Lender in connection with any
  assignment or transfer of the Senior Indebtedness. 

          Section
  16.      GOVERNING LAW. THIS SUBORDINATION
  AGREEMENT SHALL BE CONSTRUED UNDER AND GOVERNED BY THE LAWS OF THE STATE OF
  TEXAS AND APPLICABLE FEDERAL LAW. 

          Section
  17.      Severability. If any provision (or
  portion of any provision) of this Subordination Agreement is rendered or
  declared invalid, illegal or unenforceable by reason of any existing or
  subsequently enacted legislation or by a final decision of any court of
  competent jurisdiction, the parties shall promptly meet and negotiate substitute
  provisions for those 

6




rendered invalid, illegal or unenforceable, but all of the
  remaining provisions will remain in full force and effect. 

          Section
  18.      Counterparts. This Subordination
  Agreement may be executed in two or more counterparts, and it shall not be
  necessary that the signatures of all parties be contained together on any one
  counterpart of this Subordination Agreement. Each counterpart will be deemed an
  original, but all counterparts taken together will constitute one and the same
  agreement. 

          Section
  19.      ENTIRE AGREEMENT; AMENDMENT. THIS
  SUBORDINATION AGREEMENT REFLECTS THE ENTIRE AGREEMENT OF THE PARTIES WITH
  RESPECT TO THE MATTERS COVERED BY THIS SUBORDINATION AGREEMENT AND CANNOT BE
  CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
  AMONG ANY OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE
  PARTIES. This Subordination Agreement may be amended and the rights of any party
  under this Subordination Agreement may be waived only pursuant to a written
  agreement signed by each of the parties to this Subordination Agreement. 

[SIGNATURES BEGIN ON THE FOLLOWING PAGE] 

7




          IN
  WITNESS WHEREOF, the undersigned has executed this instrument effective as of
  July ___, 2008. 

SUBORDINATED CREDITOR: 

[____________________________], 

  a ___________ corporation 

	 	By: 	 
	 	Name: 	 
	 	Title: 	 


[SIGNATURE PAGE TO SUBORDINATION AGREEMENT] 




          IN
  WITNESS WHEREOF, the undersigned has caused this instrument to be executed by
  its duly authorized undersigned officer effective as of July ___, 2008. 

BORROWER: 

DORAL ENERGY CORP., 

  a
  Nevada corporation 

	 	By: 	 
	 	Name: 	 
	 	Title: 	 


[SIGNATURE PAGE TO SUBORDINATION AGREEMENT] 




          IN
  WITNESS WHEREOF, the undersigned has caused this instrument to be executed by
  its duly authorized undersigned officers effective as of July ___, 2008. 

LENDER: 

MACQUARIE BANK LIMITED, 

  a
  bank incorporated under the laws of Australia 

	 	By: 	 
	 	Name: 	 
	 	Title: 	 
	 	 	 
	 	 	 
	 	By: 	 
	 	Name: 	 
	 	Title: 	 


[SIGNATURE PAGE TO SUBORDINATION AGREEMENT] 




EXHIBIT A 

Subordinated Debt Instruments 

None. 




EXHIBIT B 

Liens 

None.



EXHIBIT H 

Form of Notice of Assignment of Proceeds 

See attached. 




MACQUARIE BANK LIMITED 

  One Allen Center, Suite 3100 

  500 Dallas Street 

  Houston, Texas 77002 

_____________, 20__

______________________

  ______________________

  ______________________

  ______________________



          Re:      Notice
  of Assignment of Proceeds 

Ladies and Gentlemen: 

          Pursuant
  to that certain Senior First Lien Secured Loan Credit Agreement (the
  “Credit Agreement”) dated effective as of July ___, 2008 between
  Doral Energy Corp., (“Doral”), as Borrower, and Macquarie Bank Limited
  (“Lender”), Doral has assigned to Lender all proceeds from the sale of
  production from or allocable to Doral’s interests in the properties (the
  “Mortgaged Properties”) identified on Exhibit A attached to the enclosed
  Deed of Trust, Mortgage, Assignment of Production, Security Agreement and
  Financing Statement dated effective as of July __, 2008 (as amended, the
  “Mortgage”). 

          Pursuant
  to the assignment of proceeds by Doral, you are hereby authorized and directed,
  effective immediately, to make all payments of amounts attributable to Doral’s
  interest in the Mortgaged Properties by wire transfer to: 

Account: 

  Bank of New York 

  New
  York, NY 10004 

  ABA No. 021000018 

  Favour: Macquarie Bank Limited – OBU
  Sydney 

  A/C No.: 8900055375 

  Chips UID: 236386 

  Reference:      Doral Energy Corp. 

If by check, checks should be made payable to Macquarie Bank
  and mailed to: 

Macquarie Bank 

  PO Box 14107A 

  Newark, NJ 07198-0107 

  Reference:      Doral Energy Corp. 




_____________________

  _____________, 20__ 

  Page 2 

          In
  consideration of your acceptance of this Notice of Assignment of Proceeds,
  Lender hereby ratifies, confirms, adopts and agrees to be bound by all previous
  sales contracts, division orders and transfer orders heretofore executed by
  Doral insofar as the same cover and relate to the interests described in the
  enclosed Mortgage. Lender hereby agrees to indemnify, save and hold you harmless
  from and against any and all claims, demands, actions, judgments, damages,
  liabilities, costs, charges, recoveries and other expense of every nature and
  character which you at any time shall or may sustain by reason of the payments
  to Lender of proceeds of production as requested and authorized hereby;
  provided, however, the aggregate liability of Lender with respect to any
  warranty, representations, covenant or indemnification contained in this letter
  or any previous sales contracts, division orders or transfer orders shall be
  limited to an amount equal to the amounts disbursed by you to Lender hereunder. 

          This
  notice of assignment of proceeds is irrevocable and you should continue to remit
  such payments as set forth above until you receive other written instructions
  signed by an authorized officer of Lender and Doral. 

          Please
  signify your understanding and agreement to comply with the terms hereof by
  signing in the indicated space below and returning a copy of this letter to
  Macquarie Bank Limited, One Allen Center, Suite 3100, 500 Dallas Street,
  Houston, Texas 77002 with a copy to Mr. Douglas C. Atnipp, Greenberg Traurig,
  LLP, 1000 Louisiana Street, Suite 1700, Houston, Texas 77002. 

[SIGNATURES APPEAR ON THE FOLLOWING PAGE] 




_____________________

  _____________, 20__ 

  Page 3 

Very truly yours, 

MACQUARIE BANK LIMITED, 

  a
  bank incorporated under the laws of Australia 

	 	By: 	 
	 	Name: 	 
	 	Title: 	 
	 	 	 
	 	 	 
	 	By: 	 
	 	Name: 	 
	 	Title: 	 


DORAL ENERGY CORP. 

  a Nevada
  corporation 

	 	By:	
	 	 	Paul Kirkitelos 
	 	 	President & CEO 


Acknowledged and Agreed to this ______ day of ________________,
  20__. 

	 	 	 
	 	 	 
	By: 	 	 
	Name: 	 	 
	Title: 	 	 


Enclosure (Mortgage) 

SIGNATURE PAGE TO NOTICE OF ASSIGNMENT OF PROCEEDS 



EXHIBIT I 

Deposit Account Control Agreement 

To be provided within 30 days after Closing Date.



EXHIBIT J 

MBL Terms and Conditions of Investment Business 

See attached. 












TABLE OF CONTENTS 


  	TERMS APPLICABLE
        TO ALL CLIENTS 







  	1. 	Regulation 	1 
	2. 	Application And
        Scope Of These Terms 	1 
	3. 	The Macquarie Group 	2 
	4. 	Your Status 	2 
	5. 	Our Services 	2 
	6. 	Instructions 	4 
	7. 	Execution Of Orders 	4 
	8. 	Our
        Responsibilities At Settlement 	5 
	9. 	Your Responsibilities At Settlement 	5 
	10. 	Our Charges 	5 
	11. 	Aggregation Of Orders 	6 
	12. 	Your Money 	6 
	13. 	Contract Notes And Statements 	6 
	14. 	Custody Of Your
        Investments 	6 
	15. 	Rights Issues, Takeovers, Etc. 	7 
	16. 	Margins,
        Collateral And Payment 	7 
	17. 	Right To Retain Your Funds 	8 
	18. 	Power Of Sale
        Over Your Investments 	8 
	19. 	Customer Warranties 	8 
	20. 	Conflict Of
        Interests 	9 
	21. 	Indemnity And Liability 	9 
	22. 	Interest 	10 
	23. 	Complaints Procedure 	10 
	24. 	Changes To
        These Terms Of Business 	10 
	25. 	Termination 	10 
	26. 	Confidentiality 	10 
	27. 	Data Protection 	11 
	28. 	Assignment 	11 
	29. 	Delay Or Omission 	11 
	30. 	General 	11 
		Appendix - Risk Warning Notice 	12 









MACQUARIE EUROPE

TERMS AND CONDITIONS OF INVESTMENT BUSINESS 

TERMS APPLICABLE TO PROFESSIONAL CLIENTS AND ELIGIBLE
  COUNTERPARTIES

	1.	REGULATION





	1.1 	These Terms of Business are issued to you by either
      Macquarie Capital (Europe) Limited 1 , Macquarie Bank
      International Limited, or Macquarie Bank Limited (London Branch).
      Macquarie Capital (Europe) Limited is a company registered in England and
      Wales (registered number 03704031) having its registered office at Level
      35 Citypoint, 1 Ropemaker Street, London EC2Y 9HD. Macquarie Bank
      International Limited is a company registered in England and Wales
      (registered number 06309906) having its registered office at Level 25
      Citypoint, 1 Ropemaker St, London EC2Y 9HD. Macquarie Bank Limited is a
      company registered in Australia which has its London branch (registered
      number BR002678) at Level 25 Citypoint, 1 Ropemaker Street, London EC2Y
      9HD.

	 	 	 
	1.2 	In these Terms of Business “Macquarie” means Macquarie
      Capital (Europe) Limited, Macquarie Bank International Limited, Macquarie
      Bank Limited (London Branch), and any Associate (as defined in these Terms
      of Business) from time to time of Macquarie Group Limited which is
      resident in the United Kingdom. References to “we”, “us” and “our” are
      references to the Macquarie company which is providing services to, or is
      otherwise dealing with, you.

	 	 	 
	1.3 	Macquarie Capital (Europe) Limited, Macquarie Bank
      International Limited and Macquarie Bank Limited (London Branch) are
      authorised and regulated in the United Kingdom by the Financial Services
      Authority (the “FSA”), whose address is 25 The North Colonnade, Canary
      Wharf, London E14 5HS. Macquarie Capital (Europe) Limited’s FSA reference
      number is 193905. Macquarie Bank International Limited’s FSA reference
      number is 471080. Macquarie Bank Limited (London Branch)’s FSA reference
      number is 170934.

	 	 	 
	1.4 	For the purposes of the Terms of Business, “Applicable
      Regulations” means all applicable laws, rules, regulations, instruments
      and provisions in force from time to time, including the rules, principles
      and codes of practice stipulated by any regulatory authority to which the
      parties are subject, including the FSA Rules. All the services that we
      provide to you under these Terms of Business are subject to Applicable
      Regulations so that:

	 	 	 
		1.4.1 	if there is any conflict between the Terms of Business
      and any Applicable Regulations, the latter will prevail;

	 	 	 
		1.4.2 	nothing in the Terms of Business shall exclude or
      restrict any duty or liability which we may have to you under Applicable
      Regulations; and

	 	 	 
		1.4.3 	we may take or omit to take any action we consider
      necessary to ensure compliance with any Applicable
      Regulations.





	2. 	APPLICATION AND SCOPE OF THESE TERMS

	 	 
	2.1 	These Terms of Business are legally binding and, from 1
      November 2007, supersede any other terms of business for investment
      business that we may previously have sent you. By providing instructions
      to us after 1 November 2007 you agree that the services will be provided
      on the basis of these Terms of Business. The Terms of Business will
      continue until they are terminated in accordance with section 25
      (Termination).

	 	 
	2.2 	These Terms of Business may be supplemented by, and shall
      be deemed to include, additional terms in respect of particular services,
      transactions or types of transaction that we carry out with or for you
      (“Additional Terms”). Such Additional Terms may already be in place
      between you and us prior to 1 November 2007, and, for the avoidance of
      doubt, such Additional Terms shall remain in full force and effect unless
      we notify you otherwise. Where there is any conflict between these Terms
      of Business and any Additional Terms, the Additional Terms shall
      prevail.



__________________________________________________

  1 Name change registered and effective from 1 November 2007, previous registered
  name was Macquarie Europe Limited. Macquarie Capital Securities is a registered
  trading name of Macquarie Capital (Europe) Limited 

Page 1 





	2.3 	We are obliged by the FSA Rules to comply with certain
      rules of conduct. However, we assume no greater responsibility nor owe you
      any fiduciary duty, other than those imposed by the FSA Rules or the
      express terms of the Terms of Business.





	3. 	THE MACQUARIE GROUP

	 	 
	3.1 	We may introduce you to our overseas branches and
      associated companies (each an “Associate”) for the purpose of providing
      any services or effecting any transactions envisaged by these Terms of
      Business. You agree that we may, from time to time, act as agent for any
      such Associate. If we agree, you may also pass orders directly to such
      Associates. Where you pass an order directly to an Associate based
      overseas or you otherwise have a direct relationship with any such
      Associate, these Terms of Business will not apply to your relationship
      with that Associate which will be governed by such other terms as may be
      provided by, or agreed with, the Associate (if any). Such overseas
      Associates may not be regulated by the FSA and, as a result, you may not
      have the benefit of the protections granted by the FSA Rules. The
      regulatory system, including compensation arrangements, applying to such
      overseas Associates may be different to that applicable in the UK. We
      shall be entitled to delegate the performance of any of our obligations
      under the Terms of Business to any Associate or such other person or
      persons as we think fit, but shall remain responsible for the acts and
      omissions of any such delegate as if they were our
      own.





	4. 	YOUR STATUS

	 	 
	4.1 	Based on the information available to us and as permitted
      by the FSA Rules, we have categorised you as an “Eligible Counterparty”
      and/ or as a “Professional Client” and notified you of this in a client
      categorisation notice (the “Client Categorisation Notice”). Even where you
      are categorised as an Eligible Counterparty, you will be treated as a
      Professional Client where Macquarie is required by the FSA Rules to treat
      you as a Professional Client.

	 	 
	4.2 	You have the right to request a different client
      categorisation. If we receive such a request, we will inform you of
      whether or not we accept it and, if we do accept it, of the consequences
      of the re-categorisation, including any limitations to the level of
      protection that such a different categorisation would entail. However,
      until we receive such a request and inform you of our acceptance of it, we
      shall deal with you on the basis of our original categorisation as set out
      in the Client Categorisation Notice.

	 	 
		You agree and acknowledge that you are responsible for
      keeping us informed about any change that could affect your categorisation
      as an Eligible Counterparty or Professional Client.

	 	 
	4.3 	If you are categorised as an Eligible Counterparty, you
      will not have the protection afforded by certain rules in the Conduct of
      Business Sourcebook of the FSA Rules, including but not limited to: 2
      (other than 2.4) (conduct of business obligations), 4 (other than 4.4.1R
      and 4.4.2G) (communicating with clients including financial promotions),
      6.1 (information about the firm, its services and remuneration), 8 (client
      agreements), 10 (appropriateness (for non advised services)), 11.2 (best
      execution), 11.3 (client order handling), 11.6 (use of dealing
      commission), 14.3 (information about designated investments) and 16
      (reporting information to clients), all as such FSA Rule references are
      amended from time to time.

	 	 
	4.4 	Unless otherwise agreed by us, if you are acting on
      behalf of any other person when dealing with us, we will continue to treat
      you alone (rather than any such other person) as our client for the
      purposes of the FSA Rules. However, if you act as agent on behalf of
      another person, you acknowledge and accept that you and your principal
      will be jointly and severally liable, each as if a principal, to us in
      respect of all of your obligations and liabilities pursuant to the Terms
      of Business.





	5. 	OUR SERVICES

	 	 
	5.1 	The services we may provide are dealing and distribution
      services, the arrangement of deals, and, where we separately agree with
      you, personal recommendations (as defined in the FSA Rules), in the
      following investments, together with related
      research:





	 	(a) 	shares;

	 	 	 
	 	(b) 	debenture stock, loan stock, bonds, notes, certificates
      of deposit, commercial paper or other debt instruments, including
      government, public agency, municipal and corporate issues;

	 	 	 
	 	(c) 	warrants to subscribe for investments falling within (a)
      or (b) above ;

	 	 	 
	 	(d) 	depository receipts or other types of instrument relating
      to investments falling within (a), (b) or (c)
      above;



Page 2 





	 	(e) 	units in regulated or unregulated collective investment
      schemes;

	 	 	 
	 	(f) 	futures and contracts for differences on commodities,
      securities, interest rate and debt instruments,

	 	 	 
	 	(g) 	stock or other indices, currencies and base and precious
      metals;

	 	 	 
	 	(h) 	spot and forward contracts on currencies, commodities,
      base and precious metals;

	 	 	 
	 	(i) 	options to acquire or dispose of any of the instruments
      falling within any of the above categories and options on
      options;

	 	 	 
	 	(j) 	notes, over-the-counter and other derivative products
      involving, referable to the value of, or granting rights or accepting
      obligations in respect of or by reference to one or more of the above
      categories together with commodities, freight, bullion, base and other
      precious metals;

	 	 	 
	 	(k) 	investments which are similar or related to any of the
      foregoing.





	5.2 	We may also provide other services if agreed between
      us.

	 	 	 	 
	5.3 	In respect of all the above, we may enter into
      transactions with you as principal or as your agent. If we act as
      principal, a statement to that effect will be included on the
      confirmation.

	 	 	 	 
	5.4 	We may also enter into transactions on your behalf under
      which you will incur obligations as an underwriter or sub-underwriter,
      subject to any limits that may from time to time be agreed between you and
      us in writing.

	 	 	 	 
	5.5 	Subject to the foregoing, and unless agreed otherwise in
      writing, there are no restrictions on the markets or types of investment
      in which we may carry on business on your behalf.

	 	 	 	 
	5.6 	For some products and transactions, we will be unable to
      provide our services to you unless you have entered into the relevant
      Additional Terms. We may also provide you with specific or general risk
      warnings in relation to some products or transactions, or types of
      products or transactions (for example in relation to contingent liability
      transactions which may commit you to further payment or liability beyond
      your initial outlay). You undertake to read such risk warnings and take
      them into account when deciding whether or not to instruct us in relation
      to the relevant products or transactions.

	 	 	 	 
	5.7 	When providing services to you, we will assume that you
      have the necessary experience and knowledge in order to understand the
      risks involved in relation to those services or relevant
      transactions.

	 	 	 	 
	5.8 	You acknowledge that unless we separately agree to
      provide you with personal recommendations (as defined in the FSA Rules)
      you are required to make your own assessment of any transaction that you
      are considering and should not rely on any information, proposal or other
      communication from us as being investment advice.

	 	 	 	 
	5.9 	If we do agree to provide you with personal
      recommendations (as defined under the FSA Rules):

	 	 	 	 
		5.9.1 	we will only advise you on the products, services and
      transactions provided by us or an Associate;

	 	 	 	 
		5.9.2 	you undertake to provide to us on request all information
      regarding your investment objectives and, where you are an elective
      professional client (as defined in the FSA Rules) your financial
      situation, so as to enable us to provide investment advice that is
      suitable for you. You represent and warrant that such information is
      complete and accurate in all material respects;

	 	 	 	 
		5.9.3 	we are entitled to assume that:

	 	 	 	 
			(a) 	in relation to the relevant transactions where investment
      advice is being provided, you have the necessary experience and knowledge
      in order to understand the risks involved in relation to those services or
      relevant transactions; and

	 	 	 	 
			(b) 	where you are a per se professional client (as defined in
      the FSA Rules), that you are financially able to bear any related
      investment risks consistent with your investment objectives in relation to
      the proposed products, transactions and services.



Page 3 





	5.9.4 	if you do not, or are unable to, provide us with the
      information we request in a timely manner, or we consider that the
      relevant product, service or transaction is not suitable for you, then
      this may result in a delay in dealing and/ or we may refuse to deal with
      or for you. It is your responsibility to seek further advice if your
      circumstances have changed.





	6. 	INSTRUCTIONS

	 	 
	6.1 	We may rely and act on any instructions, notices or
      requests of any person who is, or whom we reasonably believe to be, a
      person designated or authorised by you to give such instructions, notices
      or requests (whether given in writing or by telex, telephone,
      computer-based systems or other media) but we will not be obliged to do
      so. You warrant that any list(s) of persons named by you as authorised to
      give instructions and sign documents and take other actions in respect of
      funds and investments will be correct at the date thereof. You shall
      notify us immediately of any amendments to such list(s) and provide
      specimen signatures of new signatories.

	 	 
	6.2 	You shall promptly give any instructions to us which we
      may require in respect of any transaction or proposed transaction. If you
      do not provide such instructions promptly or following reasonable efforts
      by us, we are unable to contact you, we may, in our absolute discretion,
      take such steps at your cost as we consider necessary or desirable for our
      or your protection. If you do not provide us with notice of your intention
      to exercise an option at the time stipulated by us, we may treat the
      option as abandoned by you and, if so, will notify you.

	 	 
	6.3 	If, after instructions are received, we believe it is not
      reasonably practicable to act upon such instructions within a reasonable
      time, we may defer acting upon those instructions until it is, in our
      reasonable opinion, practicable to do so or notify you that we are
      refusing to act upon such instructions. We shall not be liable for any
      losses resulting from such deferral or refusal.

	 	 
	6.4 	We reserve the right to terminate any trading
      arrangements with you at any time and are not obliged to accept any
      particular order or to agree to enter into a transaction with you or carry
      out an instruction received from you. We may require (but shall not be
      obliged to require) written confirmation before acting on oral
      instructions.

	 	 
	6.5 	If we effect a transaction with or for you, this shall
      not be taken to mean that we recommend, or concur on the merits of, the
      transaction or that the transaction is suitable for you. If we provide
      advice to you such advice shall be express and may be given orally or in
      writing. We shall not be required to ensure that such advice takes into
      account any research or other recommendations we may have published from
      time to time. We shall not be obliged to provide you with copies of any
      published research or recommendations either at the same time as it is
      provided to an Associate or third parties or at all. We may, subject to
      the FSA Rules, effect own account transactions at any time in investments
      which are or have been the subject of such advice and/or publications, or
      any related investments. No research shall constitute an offer by us or
      any associated company to buy or sell any investment.

	 	 
	6.6 	We shall not be liable for any loss, expense, cost or
      liability (including consequential loss) suffered or incurred by you as a
      result of instructions being given, or any other communications being
      made, via the Internet or other electronic medium. You will be solely
      responsible for all orders, and for the accuracy of all information, sent
      via the Internet or other electronic medium using your name or personal
      identification number. We will not execute an order until we have verified
      the order to you and transmission of an order shall not give rise to a
      binding contract between us and you.

	 	 
	6.7 	If you are authorised under the Financial Services and
      Markets Act 2000 you agree that you will comply at all times with all
      relevant FSA Rules and you will be responsible for and will have
      undertaken all necessary identification and verification checks for the
      purposes of complying with statutory and FSA money laundering requirements
      in respect of each principal for whom you act.

	 	 
	6.8 	You confirm that we may use voice recording procedures in
      connection with receiving orders or instructions with or without the use
      of an automatic warning device. Our voice records shall be and remain our
      sole property and will, in the absence of manifest error, be conclusive
      evidence of the orders, instructions or conversations so recorded. The
      period for retention of such voice records shall be at our
      discretion.

	 	 
	7. 	EXECUTION OF ORDERS

	 	 
		If you are a Professional Client, the FSA Rules on best
      execution may apply. A summary of our current Order Execution Policy, as
      relevant to Professional Clients, has been provided to you. By agreeing to
      these Terms of Business and by providing instructions to us, you agree to
      the terms of our Order Execution Policy. In particular you consent to us
      effecting transactions on your behalf outside a regulated market or
      multilateral trading facility (as both terms are defined in the FSA
      Rules). You acknowledge that when executing certain transactions we will
      not be executing orders on your behalf and will not be subject to the
      obligation under the



Page 4 





		FSA Rules to take all reasonable steps to obtain the best
      possible result taking into account the execution factors (as defined in
      the FSA Rules). The circumstances in which we will not be executing orders
      on your behalf are set out in the summary of our Order Execution
      Policy.

	 	 
	7.1 	Orders may be executed by us or passed to any Associate
      or intermediate broker for execution. Transactions are subject
      to:





	 	(a) 	the terms and conditions of any intermediate
      broker;

	 	 	 
	 	(b) 	the customs and regulations of the relevant market,
      exchange and clearing house (“Market Rules”); and

	 	 	 
	 	(c) 	any other terms covering any particular transaction under
      the rules of any market or exchange or

	 	 	 
	 	(d) 	any separate agreement between you and
      us.





	7.2 	We may take or omit to take any action which we consider
      necessary or desirable in order to ensure compliance with any of the above
      or the FSA Rules. We shall not be liable for any loss suffered by you as a
      result of our taking or omitting to take any such action or as a result of
      the acts or omissions of any market, exchange or clearing house.

	 	 
	7.3 	Where you place a client limit order in respect of shares
      admitted to trading on a regulated market and the order is not immediately
      executed under prevailing market conditions, we shall assume that you do
      not wish us to make the order public in a manner which is easily
      accessible to other market participants unless you expressly instruct us
      otherwise.

	 	 
	8. 	OUR RESPONSIBILITIES AT SETTLEMENT

	 	 
	8.1 	We are not obliged to settle transactions or account to
      you unless and until we (or our settlement agents) have received all
      necessary documents or money from you and/or a counterparty (as
      appropriate). Where we undertake transactions for you delivery or payment
      is entirely at your risk except to the extent that any failure of delivery
      or payment is a result of our negligence, wilful default or fraud. In the
      case of securities which have already been assented to an offer,
      settlement may be delayed if the transaction can only be completed with
      securities issued by the offeror.

	 	 
	8.2 	Settlement of transactions may be administered by one of
      our Associates and you agree that we may pass all relevant information to
      any such Associate to enable it to administer such settlement.

	 	 
	9. 	YOUR RESPONSIBILITIES AT SETTLEMENT

	 	 
	9.1 	You will be responsible for the due performance of every
      transaction which we enter into with or for you, whether you are dealing
      as principal or as agent for another person. You will deliver any money or
      property due under a transaction carried out pursuant to these Terms of
      Business in accordance with the terms of the transaction or otherwise in
      accordance with our reasonable requests. We may buy investments to cover
      any liabilities of yours to deliver investments to us. We may debit your
      account(s) with any loss we suffer and/or cost we incur in this
      way.

	 	 
	10. 	OUR CHARGES

	 	 
	10.1 	Our charges for the services described in the Terms of
      Business will be disclosed to you in accordance with the FSA Rules. You
      will pay the charges prevailing at the time the services are provided. All
      charges are exclusive of VAT. Any alteration to charges will be notified
      to you before the time of the change.

	 	 
	10.2 	We may pay or receive fees, commissions or non-monetary
      benefits to or from any Associate or other third party in connection with
      the services where permitted by FSA Rules. If you are a Professional
      Client, we will provide you with separate disclosure of the essential
      arrangements relating to such fees, commissions or non-monetary
      benefits.

	 	 
	10.3 	You will be responsible for payment of all taxes,
      brokerage, transfer fees, registration fees, stamp duty and all other
      liabilities, charges, costs and expenses payable or incurred by us and/or
      a custodian in connection with the services described in these Terms of
      Business except to the extent that such liabilities, charges, costs and
      expenses arise from our negligence, wilful default or fraud. We may deduct
      from sums due to you or withhold any such estimated or actual charges at
      our reasonable discretion. Any difference between such estimated amounts
      and the final confirmed liability shall be promptly credited or debited to
      your account.



Page 5 





	10.4 	We may share our charges with all or any of our
      Associates or any third party.





	11. 	AGGREGATION OF ORDERS

	 	 
	11.1 	We may combine your order with our own orders, orders of
      Associates and persons connected with us and orders of other clients.
      Aggregation will only take place if we believe it is likely that the
      aggregation will not work overall to the disadvantage of each of the
      Professional Clients concerned. However, the effect of aggregation may
      work on some occasions to your disadvantage in relation to a particular
      order.

	 	 
	12. 	YOUR MONEY

	 	 
	12.1 	Where you are dealing with either Macquarie Bank Limited
      (London Branch) or Macquarie Bank International Limited any money held in
      an account with them will not be treated as client money within the
      meaning of the FSA Rules and we will not therefore be required to
      segregate such money, as that money will be held by us as banker and not
      as trustee.

	 	 
	12.2 	Subject to the preceding paragraph and unless agreed
      otherwise, we will treat your money as client money and hold it in
      accordance with the client money FSA Rules.

	 	 
	12.3 	We may transfer your money to an overseas branch of
      Macquarie Bank Limited (an authorised deposit- taking institution
      regulated by the Australian Prudential Regulatory Authority) and/or
      Macquarie Bank International Limited which are part of the same group of
      companies as Macquarie Capital (Europe) Limited, deposit your money in an
      overseas approved bank or pass your money to an overseas intermediate
      broker, settlement agent or counterparty outside the United Kingdom. In
      such circumstances, the legal and regulatory regime applying to the
      overseas branch, approved bank, intermediate broker, settlement agent or
      counterparty will be different from that of the United Kingdom and, in the
      event of their failure, money may be treated in a different manner from
      that which would apply if the money was held by a bank, intermediate
      broker, settlement agent or counterparty in the United Kingdom.

	 	 
	12.4 	Your money may be held or controlled by a third party,
      such as an exchange, a clearing house or an intermediate broker to enable
      transactions to be effected in accordance with your instructions or to
      meet your obligations to provide collateral for a transaction.

	 	 
	12.5 	Interest will not be payable to you on money held unless
      otherwise agreed between you and us.

	 	 
	12.6 	We may (but shall not in any circumstances be obliged to)
      convert any monies held for you into such other currency as we consider
      necessary or desirable to cover your obligations and liabilities in that
      currency at such rate of exchange as we shall select. We shall be entitled
      to charge and retain for our own account such administration fee for
      arranging such conversion as we may from time to time specify.

	 	 
	12.7 	If, from time to time, there has been no movement on an
      account (notwithstanding payments of interest or similar amounts) for six
      years we may close the relevant account and retain the sums contained
      therein for our own benefit provided we have first taken reasonable steps
      to notify you and return the balance. We agree to make good any valid
      claim made by you in respect of any balance on an account closed in this
      way.

	 	 
	13. 	CONTRACT NOTES AND STATEMENTS

	 	 
	13.1 	We will promptly provide you with confirmation of all
      transactions carried out on your behalf in accordance with the FSA Rules
      unless confirmation is provided to you by a third party, for example by a
      broker through whom we deal. You agree that we may send confirmations,
      contract notes and other statements electronically and, subject to legal,
      regulatory and market requirements we may send you a single confirmation
      or contract note in respect of a series of transactions unless agreed
      otherwise. In the absence of manifest error, all confirmations, contract
      notes and other statements which we send to you will be conclusive and
      binding on you unless you notify us in writing within 5 days of the date
      of the confirmation or statement that you disagree with its
      contents.

	 	 
	14. 	CUSTODY OF YOUR INVESTMENTS

	 	 
	14.1 	We will not be obliged to provide or arrange for any
      custody services in respect of your investments. All investments purchased
      through us and requiring registration will be registered in your name or
      as you may request, in the name of an eligible nominee or eligible
      custodian in accordance with FSA Rules. We accept no liability for the
      negligence or other default of a third party nominee or
      custodian.



Page 6 





	15. 	RIGHTS ISSUES, TAKEOVERS, ETC.

	 	 
	15.1 	Unless we accept your specific instructions as regards
      investments which we are holding on your behalf, we shall not be
      responsible for:





	 	(a) 	taking up any rights;

	 	 	 
	 	(b) 	exercising any conversion or subscription
      rights;

	 	 	 
	 	(c) 	dealing with takeover or other offers or capital
      reorganisations;

	 	 	 
	 	(d) 	exercising voting rights; or

	 	 	 
	 	(e) 	exercising any other rights which are conferred by any
      investments held by us or to our order for your
      account.





	15.2 	In the event that we hold investments on your behalf, we
      shall endeavour to advise you of the occurrence of any such rights, offers
      or capital reorganisations upon becoming aware of the same.

	 	 
	16. 	MARGINS, COLLATERAL AND PAYMENT

	 	 
	16.1 	This section 16 shall apply to the provision of security,
      margin or collateral. Where another agreement or general terms are in
      effect relating to the provision of security, margin or collateral then
      such other agreement or general terms shall prevail to the extent there is
      any conflict between such agreement or terms and this section

	 	 
	16.2 	You shall pay to us on
      demand:





	 	(a) 	such sums of money by way of deposits, or as initial or
      variation margin as we may require being, in the case of a transaction
      effected on an exchange, not less than the amount or percentage stipulated
      by the relevant exchange;

	 	 	 
	 	(b) 	such sums of money as may from time to time be due to us
      under a transaction and such sums as may be required in or towards
      clearance of any debit balance on any account with us; and

	 	 	 
	 	(c) 	such sums of money as we may from time to time require as
      security for your obligations to us.





	16.3 	With our prior written agreement on each occasion, you
      may deposit securities or other assets (“collateral”) with us or provide
      us with a guarantee or indemnity from a person and in a form acceptable to
      us instead of cash for the purpose of complying with your obligations
      under this section 16. Any securities or other assets so deposited may be
      held by an intermediate broker who will be responsible for claiming and
      receiving all interest payments, income and other rights accruing to you.
      We accept no responsibility whatsoever for the acts or omissions of any
      intermediate broker and shall not be liable to you for any losses
      resulting directly or indirectly from such acts or omissions.

	 	 
	16.4 	Notwithstanding any other provision of these Terms of
      Business, money and collateral provided to us under this section 16 shall
      be transferred absolutely to us for our own benefit and use.

	 	 
	16.5 	We may:





	 	(a) 	pass on any money or collateral received from you in
      order to satisfy our or your obligations to any third party;

	 	 	 
	 	(b) 	charge, pledge or grant any security arrangement over
      collateral in order to satisfy our or your obligations to any third party,
      in which case the collateral may not be registered in your name;

	 	 	 
	 	(c) 	lend collateral to any third party, in which case the
      collateral may not be registered in your name; and

	 	 	 
	 	(d) 	return to you assets other than the original collateral
      or type of collateral.



Page 7 





	16.6 	We shall not be obliged to account to you for any income
      received as a result of carrying out any of these activities.

	 	 
	16.7 	If you fail to provide any margin, deposit or other sum
      due under these Terms of Business we may close out any open position
      without prior reference to you and apply any proceeds thereof to payment
      of any amounts due to us.

	 	 
	16.8 	You may not withdraw or substitute any property which we
      hold as security, margin or collateral without our prior
      consent.

	 	 
	16.9 	You shall, immediately upon request, execute all
      documents and do all such things as we may reasonably request in order to
      enable us to exercise our rights under this section 16 or section
      19.

	 	 
	17. 	RIGHT TO RETAIN YOUR FUNDS

	 	 
	17.1 	We may retain or make deductions from amounts which we
      owe to you or are holding for you in respect of all sums due and payable
      by you to us (including margin, fees and commission) even though arising
      in a different transaction. Where debits and credits are expressed in
      different currencies, and we would have had a right of retention or
      set-off if the sums concerned had been in the same currency, we shall be
      entitled at your expense to convert any sums owing to you into the
      currency of your debt to us for the purpose of effecting the said
      retention or set-off.

	 	 
	18. 	POWER OF SALE OVER YOUR INVESTMENTS

	 	 
	18.1 	All investments (including collateral) which we hold or
      are entitled to receive on your behalf shall be a continuing security for
      the payment and satisfaction of all sums which may at any time be or
      become due from you to us, including any interest payable to us hereunder
      and reasonable costs, charges and expenses paid or incurred in perfecting
      or enforcing our security or otherwise.

	 	 
	18.2 	If you fail to meet your liabilities under these Terms of
      Business as and when they become due we may, without prior notice, sell
      all or any of such investments at such price and in such manner as we may
      in our reasonable discretion decide without being responsible for any loss
      or diminution in price and apply any proceeds of such sale in or
      towards:





	 	(a) 	discharge of the costs of such sale; and

	 	 	 
	 	(b) 	discharge of the sums secured by this section
      18.





	18.3 	If you fail to meet your liabilities under these Terms of
      Business we may close out or require you to close out immediately any open
      positions and/or buy any investment or other property where this is, or is
      in our reasonable opinion likely to be, necessary in order for us to
      fulfil our obligations under any transaction entered into as a result of
      your instructions (you shall reimburse us for the full amount of the
      purchase price plus any associated costs and expenses) and/or treat any
      outstanding transactions as cancelled and terminated.

	 	 
	19. 	CUSTOMER WARRANTIES

	 	 
	19.1 	You warrant and represent
      that:





	 	(a) 	you are not under any legal disability with respect to,
      and are not subject to any law or regulation which prevents your
      performance of, these Terms of Business or any transaction contemplated by
      these Terms of Business;

	 	 	 
	 	(b) 	you have obtained all necessary consents and have the
      capacity and authority to enter into these Terms of Business;

	 	 	 
	 	(c) 	investments or other property supplied by you shall,
      subject to these Terms of Business, at all times be free from any charge,
      lien, pledge or encumbrance and, unless you are a trustee, shall be
      beneficially owned by you; and

	 	 	 
	 	(d) 	you are in compliance with all laws to which you are
      subject including, without limitation, all tax laws and regulations,
      exchange control requirements and registration requirements that would
      affect the enforceability of these Terms of Business or the
      transactions.



Page 8 





	19.2 	The warranties and representations in this section 19
      shall be deemed to be repeated each time you provide instructions,
      investments or collateral to us.





	20. 	CONFLICT OF INTERESTS

	 	 
	20.1 	Macquarie has established and implemented a conflicts
      policy at group level (which may be revised and updated from time to time)
      (the “Conflicts Policy”) pursuant to the FSA Rules, which sets out how we
      must seek to identify and manage all material conflicts of
      interest.

	 	 
	20.2 	You agree that we may transact business in circumstances
      where we have, or which give rise to, and may maintain, such an interest,
      relationship or arrangement without prior reference to you and retain all
      benefits received therefrom. In addition, we may provide advice and other
      services to third parties whose interests may be in conflict or
      competition with your interests. We, our Associates and our or their
      employees may take positions opposite to you or may be in competition with
      you to acquire the same or a similar position. We will not deliberately
      favour any person over you but will not be responsible for any loss which
      may result from such competition.

	 	 
	20.3 	Such conflicting interests or duties may arise
      because:





	 	(a) 	we may be dealing as principal or agent or be registered
      as a market maker in the investments that are the subject of a transaction
      or providing services to other persons with interests in or proposing to
      acquire such investments;

	 	 	 
	 	(b) 	we may be a financial adviser or lending banker to the
      issuer of such investments;

	 	 	 
	 	(c) 	we may be dealing as agent on your behalf with a person
      connected with us or conducting an “agency cross” by matching your order
      with the order of another party (who may be a person connected with us) or
      receive a commission or other payment from the counterparty or broker to
      any transaction which we carry out on your behalf;

	 	 	 
	 	(d) 	a transaction may be in units in a unit trust or
      collective investment scheme of which a person connected with us is a
      manager or trustee or in investments where the issuer is a person
      connected with us or in investments in which we or a person or persons
      connected with us have undertaken or underwritten an issue within a period
      of 12 months before the date of the transaction;

	 	 	 
	 	(e) 	a transaction may be in investments in respect of which
      we or a person or persons connected with us are contemporaneously trading
      or have traded on our own account or have either a long or short
      position;

	 	 	 
	 	(f) 	we may have acted upon or used our, or their, published
      research recommendations (or the conclusions which they expressed or the
      research or analysis on which they are based ) before the recommendations
      have been published to our (or their) customers;

	 	 	 
	 	(g) 	we may deal with you as principal in a foreign exchange
      transaction.





	20.4 	You should also understand that we or persons connected
      with us may carry on corporate finance business for clients. In such
      circumstances you may receive or see an investment publication or other
      document communicated or approved by us, or containing invitations,
      offers, recommendations or advice from us, or persons with which we are
      associated, to the public or a class of persons in which you are included.
      However, you should not treat that as representing advice from us to you
      as a customer about suitability, or look to us to regard you as a
      customer, whether for the purpose of securing best execution or otherwise.
      Before entering into any commitment in such a case, you are recommended to
      seek specific advice on the merits and suitability of the proposed
      transaction.

	 	 
	21. 	INDEMNITY AND LIABILITY

	 	 
	21.1 	You shall fully indemnify us and keep us fully
      indemnified against all losses, expenses, costs and liabilities (together
      “Losses”) which arise as a result of or in connection with your breach of
      these Terms of Business or the proper provision by us of the services or
      the exercise of any rights envisaged by these Terms of Business
      (including, for the avoidance of doubt, any fines which may be imposed
      upon us as a result of late settlement of any transaction and any costs
      incurred in enforcing our rights or defending any action or claim brought
      by a third party or any losses arising from acting on your instructions,
      or instructions reasonably believed to be given by you or on your
      behalf).



Page 9 





	21.2 	We shall not be liable for any Losses suffered or
      incurred by you unless such Losses are suffered or incurred as a result of
      our negligence, wilful default or fraud. We shall not be responsible for
      any consequential loss suffered or incurred by you whether arising from
      our negligence or otherwise or for any loss suffered or incurred by you as
      a result of any third party failing to perform its obligations to
      us.

	 	 
	21.3 	Macquarie Capital (Europe) Limited and Macquarie Bank
      International Limited are not authorised deposit- taking institutions for
      the purposes of the Banking Act 1959 (Commonwealth of Australia), and
      their obligations do not represent deposits or other liabilities of
      Macquarie Bank Limited ABN 46 008 583 542. Macquarie Bank Limited does not
      guarantee or otherwise provide assurance in respect of the obligations of
      Macquarie Capital (Europe) Limited and Macquarie Bank International
      Limited.

	 	 
	22. 	INTEREST

	 	 
	22.1 	If you fail to pay any amount when it is due, we reserve
      the right to charge interest (both before and after judgment) on such
      unpaid amount calculated at the rate reasonably determined by us to be the
      reasonable cost of funding such overdue amount. Such interest shall accrue
      and be calculated daily from the due date to the date of payment and shall
      be compounded monthly.

	 	 
	23. 	COMPLAINTS PROCEDURE

	 	 
	23.1 	We have internal procedures for handling complaints
      fairly and promptly. You may submit a complaint to the compliance officer,
      for example, by letter, telephone, fax or e-mail. We will send you a
      written acknowledgement of your complaint enclosing details of our
      complaints procedure. Further details regarding our complaints procedures
      are available on request.

	 	 
	24. 	CHANGES TO THESE TERMS OF BUSINESS

	 	 
	24.1 	We may amend these Terms of Business by sending you a
      written notice describing the relevant changes. Such changes will become
      effective on a date to be specified in the notice.

	 	 
	24.2 	Any changes to these Terms of Business proposed by you
      will become effective only once they have been agreed by us in
      writing.

	 	 
	25. 	TERMINATION

	 	 
	25.1 	You are entitled to terminate these Terms of Business by
      giving immediate written notice to us, as we may by giving you immediate
      written notice. No penalty will become due from either you or us in
      respect of the termination of these Terms of Business. However, we may
      require you to pay charges for transferring any investments held for you.
      Termination of these Terms of Business will not affect any outstanding
      order or transaction or accrued charges under these Terms of Business or
      any legal rights or obligations which may already have arisen.

	 	 
	26. 	CONFIDENTIALITY

	 	 
	26.1 	Subject to section 27, neither party to these Terms of
      Business shall, without the prior written consent of the other, use or
      disclose any information relating to the business, investments, finances
      or other matters of a confidential nature of the other party except to the
      extent that such use or disclosure is to an Associate or is required by
      law or any regulatory authority or is desirable for the purposes of, or to
      enable the disclosing party to properly perform its obligations under,
      these Terms of Business.

	 	 
	26.2 	Neither we nor any Associate is obliged to disclose to
      you or to take into consideration or utilise for your benefit any fact,
      matter or thing:





	 	(a) 	if in our or its opinion disclosure of the information
      would or might be a breach of duty or confidence to any other person or
      render our or its employees liable to criminal or civil proceedings ;
      or

	 	 	 
	 	(b) 	which comes to the notice of an officer, employee or
      agent of ours or of any Associate but does not come to the actual notice
      of the individual or individuals with whom you are
      dealing.





	26.3 	The obligations in this section 26 shall not apply to any
      confidential information lawfully in a party’s possession otherwise than
      as a result of the Terms of Business or coming into the public domain
      otherwise than by breach by any party of its obligations contained in the
      Terms of Business. For the avoidance of doubt, we and our Associates will
      be entitled to disclose confidential information if we are required
      or



Page 10 





		requested to disclose such information by a relevant
      regulatory authority or pursuant to any Applicable Regulations.

	 	 
	26.4 	The provisions of this section 26 shall continue to bind
      you and us after termination of these Terms of Business.

	 	 
	27. 	DATA PROTECTION

	 	 
	27.1 	We may use, store or otherwise process any personal
      information provided by you, your employees, agents or representatives.
      Such personal information may be processed by us for the purpose of
      administering these Terms of Business, providing services to you, or
      marketing financial services and products provided by us or third parties
      to you (“Permitted Purposes”). If you do not want personal information to
      be used for marketing purposes, please notify us. We may, for any
      Permitted Purpose, transfer or disclose personal information to any
      Associate of ours anywhere in the world, to any person acting on our
      behalf and to any person to whom we are permitted to delegate any of our
      functions under these Terms of Business (other than to the extent that you
      have indicated that you do not want your personal information to be used
      for marketing purposes). You agree to the processing and disclosure of
      personal information for the Permitted Purposes and agree to procure such
      consent from your employees, agent and representatives. You also agree
      that the Permitted Purposes may be amended to include other uses or
      disclosures of personal information by notice to you. You may request us
      to make available to you a copy of your personal information.

	 	 
	28. 	ASSIGNMENT

	 	 
	28.1 	You may not assign any of your rights or delegate any of
      your obligations under these Terms of Business.

	 	 
	29. 	DELAY OR OMISSION

	 	 
	29.1 	No delay or omission in exercising any right, power or
      remedy provided by law or under these Terms of Business, or partial or
      defective exercise thereof, shall prevent further or other exercise of, or
      operate as a waiver of, such right, power or remedy. No waiver of any
      breach of any term of these Terms of Business shall (unless expressly
      agreed in writing by the waiving party) be construed as a waiver of a
      future breach of the same term or as authorising a continuation of the
      particular breach.

	 	 
	30. 	GENERAL

	 	 
	30.1 	These Terms of Business shall be governed by and
      construed in accordance with the laws of England and each party submits to
      the non-exclusive jurisdiction of the English Courts.

	 	 
	30.2 	If at any time any provision of these Terms of Business
      is or becomes illegal, invalid or unenforceable in any respect under the
      law of any jurisdiction, neither the legality, validity or enforceability
      of the remaining provisions of these Terms of Business under the law of
      that jurisdiction nor the legality, validity or enforceability of such
      provision under the law of any other jurisdiction shall be in any way
      affected.

	 	 
	30.3 	We shall not be in breach of these Terms of Business and
      shall not be liable or have responsibility of any kind for any loss or
      damage incurred by you as a result of our failure to perform any or all of
      our obligations, where such failure arises from or is attributable to
      either acts, events or omissions or accidents beyond our reasonable
      control, including but without limitation any breakdown, malfunction or
      failure of transmission, act of God, war, terrorism, malicious damage,
      civil commotion, failure of any computer system, interruptions of power
      supplies or industrial action.

	 	 
	30.4 	We shall be entitled to communicate with you by
      telephone, fax, e-mail or by post. You may communicate with us by post at
      the address given in section 1.1 of these Terms of Business, telephone,
      fax or electronic mail, unless you are obliged to communicate in writing
      under these Terms of Business, in which case you may communicate with us
      by letter delivered by post or personal delivery to that
      address.

	 	 
	30.5 	You confirm that you have regular access to the Internet
      and consent to us providing you with information, including information
      about our Order Execution Policy and information about the nature and
      risks of investments, by electronic message or by posting such information
      on our website at http://www.macquarie.com/eu/ or such other website as we may from time to
      time notify to you.



Page 11 




APPENDIX - RISK WARNING NOTICE 

This notice is supplementary to the terms and conditions for
  investment business which you may receive from time to time (“the Terms of
  Business”). 

	1. 	GENERAL



The value of investments and the income from them may fluctuate
  and go down as well as up. There is no guarantee that you will get back the
  amount initially invested. The value of investments may be affected by a variety
  of factors, including economic and political developments, interest rates and
  foreign exchange rates, as well as issuer-specific events. 

Investments denominated in currencies other than your base
  currency carry the risk of exchange-rate movements. A movement in exchange rates
  may have a separate effect, unfavourable as well as favourable, on your gains
  and losses. Hedging techniques may, in certain circumstances, be limited or not
  be successful. 

The market for some investments may be restricted or illiquid.
  There may be no readily available market and from time to time there may be
  difficulty in dealing in such investments or obtaining reliable information
  about the value and extent of risks associated with such investments. 

	2. 	EQUITY SECURITIES



Buying equity securities (the most common form of which is
  shares) will mean that you will become a member of the issuer company and
  participate fully in its economic risk. Holding equity securities will generally
  entitle you to receive any dividend distributed each year (if any) out of the
  issuer's profits made during the reference period. 

Generally, holdings in equity securities will expose you to
  more risk than debt securities since remuneration is tied more closely to the
  profitability of the issuer. In the event of insolvency of the issuer, your
  claims for recovery of your equity investment in the issuer will generally be
  subordinated to the claims of both preferred or secured creditors and ordinary
  unsecured creditors of the issuer. 

There is an extra risk of losing money when shares are bought
  in some smaller companies, such as penny shares. There is a big difference
  between the buying price and the selling price of these shares. If they have to
  be sold immediately, you may get back much less than was paid for them. The
  price may change quickly and it may go down as well as up. 

If you buy equity securities you will be exposed to both the
  specific risks associated with individual securities held (and the financial
  soundness of their issuers), as well as the systemic risks of the equity
  securities markets. 

	3. 	DERIVATIVES



This notice cannot disclose all the risks and other significant
  aspects of warrants and/or derivative products such as futures, options, and
  contracts for differences. You should not deal in these products unless you
  understand their nature and the extent of your exposure to risk. You should also
  be satisfied that the product is suitable for you in the light of your
  circumstances and financial position. Certain strategies, such as a 'spread'
  position or a 'straddle', may be as risky as a simple 'long' or 'short'
  position. Although warrants and/or derivative instruments can be utilised for
  the management of investment risk, some of these products are unsuitable for
  many investors. Different instruments involve different levels of exposure to
  risk and in deciding whether to trade in such instruments you should be aware of
  the following points. 

(a)        WARRANTS 

A warrant is a time-limited right to subscribe for shares,
  debentures, loan stock or government securities and is exercisable against the
  original issuer of the underlying securities. 

A relatively small movement in the price of the underlying
  security results in a disproportionately large movement, unfavourable or
  favourable, in the price of the warrant. The prices of warrants can therefore be
  volatile. 

It is essential for anyone who is considering purchasing
  warrants to understand that the right to subscribe which a warrant confers is
  invariably limited in time with the consequence that if the investor fails to
  exercise this right within the predetermined timescale then the investment
  becomes worthless. 

You should not buy a warrant unless you are prepared to sustain
  a total loss of the money you have invested plus any commission or other
  transaction charges. 

Page 12 




Some other instruments are also called warrants but are
  actually options (for example, a right to acquire securities which is
  exercisable against someone other than the original issuer of the securities,
  often called a 'covered warrant'). 

(b)        OFF-EXCHANGE
  WARRANT TRANSACTIONS 

Transactions in off-exchange warrants may involve greater risk
  than dealing in exchange traded warrants because there is no exchange market
  through which to liquidate your position, or to assess the value of the warrant
  or the exposure to risk. Bid and offer prices need not be quoted, and even where
  they are, they will be established by dealers in these instruments and
  consequently it may be difficult to establish what is a fair price. 

Your firm must make it clear to you if you are entering into an
  off-exchange transaction and advise you of any risks involved. 

(c)        FUTURES 

Transactions in futures involve the obligation to make, or to
  take, delivery of the underlying asset of the contract at a future date, or in
  some cases to settle the position with cash. They carry a high degree of risk.
  The 'gearing' or 'leverage' often obtainable in futures trading means that a
  small deposit or down payment can lead to large losses as well as gains. It also
  means that a relatively small movement can lead to a proportionately much larger
  movement in the value of your investment, and this can work against you as well
  as for you. Futures transactions have a contingent liability, and you should be
  aware of the implications of this, in particular the margining requirements,
  which are set out in paragraph 8. 

(d)        OPTIONS 

There are many different types of options with different
  characteristics. 

Buying options: 

Buying options involves less risk than selling options because,
  if the price of the underlying asset moves against you, you can simply allow the
  option to lapse. The maximum loss is limited to the premium, plus any commission
  or other transaction charges. However, if you buy a call option on a futures
  contract and you later exercise the option, you will acquire the future. This
  will expose you to the risks described under 3 and 8. 

Writing options 

If you write an option, the risk involved is considerably
  greater than buying options. You may be liable for margin to maintain your
  position and a loss may be sustained well in excess of the premium received. By
  writing an option, you accept a legal obligation to purchase or sell the
  underlying asset if the option is exercised against you, however far the market
  price has moved away from the exercise price. If you already own the underlying
  asset which you have contracted to sell (when the options will be known as
  'covered call options') the risk is reduced. If you do not own the underlying
  asset ('uncovered call options') the risk can be unlimited. Only experienced
  persons should contemplate writing uncovered options, and then only after
  securing full details of the applicable conditions and potential risk exposure. 

Traditional options 

Certain London Stock Exchange member firms under special
  exchange rules write a particular type of option called a 'traditional option'.
  These may involve greater risk than other options. Two-way prices are not
  usually quoted and there is no exchange market on which to close out an open
  position or to effect an equal and opposite transaction to reverse an open
  position. It may be difficult to assess its value or for the seller of such an
  option to manage his exposure to risk. 

Certain options markets operate on a margined basis, under
  which buyers do not pay the full premium on their option at the time they
  purchase it. In this situation you may subsequently be called upon to pay margin
  on the option up to the level of your premium. If you fail to do so as required,
  your position may be closed or liquidated in the same way as a futures position. 

(d)        CONTRACTS FOR
  DIFFERENCES 

Futures and options contracts can also be referred to as
  contracts for differences. These can be options and futures on the FTSE 100
  index or any other index, as well as currency and interest rate swaps. However,
  unlike other futures and options, these contracts can only be settled in cash.
  Investing in a contract for differences carries the same risks as investing in a
  future or an option and you should be aware of these as set out in paragraphs 3
  and 4 respectively. Transactions in contracts for differences may also have a
  contingent liability and you should be aware of the implications of this as set
  out in paragraph 8. 

Page 13 




(e)        OFF-EXCHANGE
  TRANSACTIONS IN DERIVATIVES 

It may not always be apparent whether or not a particular
  derivative is arranged on exchange or is an off-exchange derivative transaction.
  Your firm must make it clear to you if you are entering into an off-exchange
  derivative transaction. 

While some off-exchange markets are highly liquid, transactions
  in off-exchange or 'non transferable' derivatives may involve greater risk than
  investing in on-exchange derivatives because there is no exchange market on
  which to close out an open position. It may be impossible to liquidate an
  existing position, to assess the value of the position arising from an
  off-exchange transaction or to assess the exposure to risk. Bid prices and offer
  prices need not be quoted, and, even where they are, they will be established by
  dealers in these instruments and consequently it may be difficult to establish
  what is a fair price. 

	4. 	FOREIGN MARKETS



Foreign markets will involve different risks from the UK
  markets. In some cases the risks will be greater. On request, your firm must
  provide an explanation of the relevant risks and protections (if any) which will
  operate in any foreign markets, including the extent to which it will accept
  liability for any default of a foreign firm through whom it deals. The potential
  for profit or loss from transactions of foreign markets or in foreign
  denominated contracts will be affected by fluctuations in foreign exchange
  rates. 

	5. 	CONTINGENT LIABILITY INVESTMENT
      TRANSACTIONS



Contingent liability investment transactions, which are
  margined, require you to make a series of payments against the purchase price,
  instead of paying the whole purchase price immediately. 

If you trade in futures contracts for differences or sell
  options, you may sustain a total loss of the margin you deposit with your firm
  to establish or maintain a position. If the market moves against you, you may be
  called upon to pay substantial additional margin at short notice to maintain the
  position. If you fail to do so within the time required, your position may be
  liquidated at a loss and you will be responsible for the resulting deficit. Even
  if a transaction is not margined, it may still carry an obligation to make
  further payments in certain circumstances over and above any amount paid when
  you entered the contract. 

Save as specifically provided by the FSA, your firm may only
  carry out margined or contingent liability transactions with or for you if they
  are traded on or under the rules of a recognised or designated investment
  exchange. Contingent liability investment transactions which are not so traded
  may expose you to substantially greater risks. 

	6. 	LIMITED LIABILITY
      TRANSACTIONS



Before entering into a limited liability transaction, you
  should obtain from your firm or the firm with whom you are dealing a formal
  written statement confirming that the extent of your loss liability on each
  transaction will be limited to an amount agreed by you before you enter into the
  transaction. 

The amount you can lose in limited liability transactions will
  be less than in other margined transactions, which have no predetermined loss
  limit. Nevertheless, even though the extent of the loss will be subject to the
  agreed limit, you may sustain the loss in a relatively short time. Your loss may
  be limited, but the risk of sustaining a total loss to the amount agreed is
  substantial. 

	7. 	COLLATERAL



If you deposit collateral as security with your firm, the way
  in which it will be treated will vary according to the type of transaction and
  where it is traded. There could be significant differences in the treatment of
  your collateral, depending on whether you are trading on a recognised or
  designated investment exchange, with the rules of that exchange (and the
  associated clearing house) applying, or trading off-exchange. Deposited
  collateral may lose its identity as your property once dealings on your behalf
  are undertaken. 

Even if your dealings should ultimately prove profitable, you
  may not get back the same assets which you deposited, and may have to accept
  payment in cash. You should ascertain from your firm how your collateral will be
  dealt with. 

	8. 	COMMISSIONS



Before you begin to trade, you should obtain details of all
  commissions and other charges for which you will be liable. If any charges are
  not expressed in money terms (but, for example, as a percentage of contract
  value), you should obtain a clear and written explanation, including appropriate
  examples, to establish what such charges are likely to mean in specific money
  terms. In the case of futures, when commission is charged as a percentage, it
  will normally be as a percentage of the total contract value, and not simply as
  a percentage of your initial payment. 

Page 14 





	9. 	SUSPENSIONS OF TRADING



Under certain trading conditions it may be difficult or
  impossible to liquidate a position. This may occur, for example, at times of
  rapid price movement if the price rises or falls in one trading session to such
  an extent that under the rules of the relevant exchange trading is suspended or
  restricted. Placing a stop-loss order will not necessarily limit your losses to
  the intended amounts, because market conditions may make it impossible to
  execute such an order at the stipulated price. 

	10. 	CLEARING HOUSE PROTECTION



On many exchanges, the performance of a transaction by your
  firm (or third party with whom he is dealing on your behalf) is `guaranteed' by
  the exchange or clearing house. However, this guarantee is unlikely in most
  circumstances to cover you, the customer, and may not protect you if your firm
  or another party defaults on its obligations to you. On request, your firm must
  explain any protection provided to you under the clearing guarantee applicable
  to any on-exchange derivatives in which you are dealing. There is no clearing
  house for traditional options, or normally for off-exchange instruments. 

	11. 	INSOLVENCY



Your firm's insolvency or default, or that of any other brokers
  involved with your transaction, may lead to positions being liquidated or closed
  out without your consent. In certain circumstances, you may not get back the
  actual assets which you lodged as collateral and you may have to accept any
  available payments in cash. On request, your firm must provide an explanation of
  the extent to which it will accept liability for any insolvency of, or default
  by, other firms involved with your transactions. 

Page 15 




ANNEX I 

Lenders 

Lenders, Lenders’ Percentages and Maximum Commitment

	Lender 	Commitment 	Lender Percentage 
	Macquarie Bank Limited 	$50,000,000 	100.0% 


Lender and Administrative Agent

	Administrative Agent’s Office 	Agent’s Wire Instructions 
	(only for payments and Advance Requests) 	 
	 	 
	Macquarie Bank Limited, Administrative Agent 	Bank of New York 
	500 Dallas Street 	New York, New York 10004 
	Suite 3100 	ABA #: 021000018 
	Houston, Texas 77002 	Favour: Macquarie Bank Limited – OBU Sydne 
	Attn: Mike Sextro 	Sydney 
	Phone: (713) 275-6207 	A/C No.: 8900055375 
	Fax: (713) 275-6222 	Chips UID: 236386 
	Email: michael.sextro@macquarie.com 	REFERENCE: Doral Energy Corp. 


All Other Notices to Agent 

Macquarie Bank Limited, Administrative Agent 

  500 Dallas
  Street 

  Suite 3100 

  Houston, Texas 77002 

  Attn:      Linda Cox 

  Phone:   (713)
  275-6221 

  Fax:         (713) 275-6222 

  Email:      linda.cox@macquarie.com

with a copy to: 

Greenberg Traurig, LLP 

  1000 Louisiana Street, 17th Floor 

  Houston, Texas 77002 

  Attn:      Douglas C.
  Atnipp 

  Phone:    (713) 374-3515 

  Fax:         (713) 374-3505 

  Email:       atnippd@gtlaw.com




Notices to Macquarie Bank Limited as a Lender 

Macquarie Americas Corp. 

  500 Dallas Street 

  Suite 3100 

  Houston, Texas 77002 

  Attn:     Mike Sextro 

  Phone    (713) 275-6207 

  Fax:         (713) 275-6222 

  Email:     michael.sextro@macquarie.com

with a copy to: 

Greenberg Traurig, LLP 

  1000 Louisiana Street, 17th Floor 

  Houston, Texas 77002 

  Attn:     Douglas C. Atnipp 

  Phone:   (713) 374-3515 

  Fax:         (713) 374-3505 

  Email:      atnippd@gtlaw.com




Schedule 2.6(d) 

Authorized Signatories on Advanced Requests

	NAME 	TITLE 	SIGNATURE 
	 	 	 
	Paul Kirkitelos 	President & CEO 	/s/ Paul Kirkitelos 
	 	 	 
	Horace Patrick Seale 	Chief Operating Officer 	/s/ Horace Patrick Seale 







Schedule 4.3 

Ownership of Equity Interests of Borrowers 

Doral is a publicly traded company. The company has
  2,500,000,000 authorized shares, of which 100,587,500 common shares are issued
  and outstanding.

Amongst Doral management, the ownership interests are: 

	

        

      ISSUER 	

        

      SHAREHOLDER 	

        CLASS 

      OF STOCK 	NO. OF 

        SHARES 

      OF
        STOCK 
	 	 	 	 
	Doral Energy Corp. 
	Paul Kirkitelos 
	restricted 

      common shares 	46,800,000 

	 	 	 	 
	Doral Energy Corp. 
	E. Willard Gray (through 

      W.S. Oil & Gas LTD) 	restricted 

      common shares 	9,700,000 

	 	 	 	 
	Doral Energy Corp. 
	H. Patrick Seale (through 

      Seale Energy Partners L.P.) 	restricted 

      common shares 	2,000,000 



The remainder of the shares are free-trading common shares
  owned by public shareholders. 




Schedule 4.4(d) 

Consents 

None.




Schedule 4.8 

Brokerage Fees 

None. 




Schedule 4.10 

Litigation

None. 




Schedule 4.11(c) 

Agreements to Acquire Interests in Hydrocarbons

Letter Agreement dated April 10, 2008 between Language
  Enterprises Corp [now known as Doral Energy Corp.] and G2 Petroleum, LLC (“G2”)
  regarding purchase of an interest in G2’s Diamond Springs Prospect located in
  Freemont County, Wyoming, as more particularly described in that certain
  Purchase Agreement dated January 25, 2008 by and between G2 Petroleum, LLC and
  Laser Oil & Gas Exploration.




Schedule 4.12 

Debt


  	Little Bay Consulting SA 	$	320,000 	 
	 	 	 	 
	Green Shoe Investments Ltd. 	 	300,000 	 
	 	 	 	 
	           
               TOTAL 	$	620,000 	 









Schedule 4.16 

Environmental Matters

None. 




Schedule 4.17 

Operating Permits and Licenses

	1) 	New Mexico Oil Conservation Division: Registered, Bonded
      Operator

	 	 
	2) 	United States Bureau of Land Management: Registered,
      Bonded Operator








Schedule 4.20 

Contingent Liabilities

None. 




Schedule 4.22

Unpaid Bills 

Unpaid Bills due from Doral Energy: None 

Vendor List: 

	Name 	Purpose 
	AAGA 	fittings and oilfield supplies 
	Artesia Building Supply 	fittings and oilfield supplies 
	Ray Bell Oil Co. 	gasoline 
	Blaine Haines 	water supplier 
	Bulldog Lease Works 	pulling unit 
	Bureau of Land Management 	royalties, lease fees, ROW 
	Cardinal Laboratories 	analysis 
	CVE 	electric 
	Deans 	electric for supplies and
      motors 
	Devon 	rental 
	Flow Products 	oilfield supplies 
	George Young Sales 	oilfield supplies 
	I&W 	water hauler 
	JWS of NM 	water hauler 
	Mesquite 	roustabout 
	Miller Chemical 	chemicals 
	Odessa Pumps 	pump supplies 
	OK Hot Oil 	water hauler 
	Onda Lay 	pipe 
	Permian Treating Chemicals, Inc. 	chemicals 
	Plains Welding 	rental of oxygen 
	Plateau wireless 	cellphones 
	Precision Pump 	pump service 
	Southeast Readi-Mix 	cementing 
	Standard Oilfield Supply 	oilfield supplies 
	Sweatt Construction, Inc. 	dirt work 
	T & C Tank Rental 	tank rental 
	The Supply Store 	oilfield supplies 
	Truck & Trailer Supply 	oilfield supplies 
	United Fuel & Energy 	gasoline 







Schedule 4.26

Other Agreements 

None. 




Schedule 4.29 

Operators/Operating Agreements

	1) 	State N Lease: Operating Agreement between Gulf Oil
      Corporation and L. N. Marbry, dated October 31, 1956, recorded in Book 77,
      Page 392, Oil and Gas Records of Eddy County, New Mexico; Gulf Oil
      Corporation reserves a preferential right to purchase.

	 	 
	2) 	State B Lease: Operating Agreement between Gulf Oil
      Corporation (now held by SDX Resources, Inc.) and L. N. Marbry, dated
      October 31, 1956, recorded in Book 77, Page 392, Oil and Gas Records of
      Eddy County, New Mexico; Gulf Oil Corporation reserves a preferential
      right to purchase.

	 	 
	3) 	Federal S Lease: Lease Operating Agreement between
      Ambassador Oil Corporation and Francis Weller, dated June 14, 1965,
      recorded in Book 158, Page 377, Oil and Gas Records of Eddy County, New
      Mexico.

	 	 
	4) 	Federal X Lease: Lease Operating Agreement between
      Ambassador Oil Corporation and Francis Weller, dated June 14, 1965,
      recorded in Book 158, Page 377, Oil and Gas Records of Eddy County, New
      Mexico.








Schedule 4.32 

Employee Plans

None. 




Schedule 4.40 

Hedging Agreements

None. 




Schedule 4.41 

Marketing Contracts

	1) 	Gas Purchase Contract between Duke Energy Field Services,
      LP (now DCP Midstream, LLC) and Hanson Energy dated May 20,
      2002.

	 	 
	2) 	Gas Purchase Contract between Duke Energy Field Services,
      LP (now DCP Midstream, LLC) and SDX Resources, Inc. [assumed by Warren
      Hanson] d/b/a Hanson Energy dated June 6, 2002.

	 	 
	3) 	Lease Crude Oil Purchase Agreement between ConocoPhillips
      Company and Warren Hanson d/b/a Hanson Energy dated October 22,
      2003.

	 	 
	4) 	Oil Purchase Agreement between Navajo Refining Company,
      LP and Hanson Energy, as amended September 9,
      2007.








Schedule 4.42 

Deposit Accounts

	BANK 	ACCOUNT NO. 	ACCOUNT NAME 


 

 

Borrower will enter into a deposit account with Citibank, N.A.
  within 30 days after Closing Date, at which time all applicable account
  information will be provided. 




Schedule 6.9(c) 

Insurance

See attached.

















Schedule 6.19

Bonds and Qualifications

	1) 	Bond No. B004526 
	 	$25,000 Statewide Oil & Gas
      Bond 
	 	(covering New Mexico) 
	 	Bureau of Land
      Management 
	 	
	2) 	Bond No. B004527 
	 	$50,000 Blanket Plugging Bond 
		Oil Conservation
      Division 
	 	
	3) 	Bond No. B004528 
	 	$7,980 One-Well Plugging Bond 
		Oil Conservation
      Division 
	 	Spurck State No. 009 
	 	
	4) 	Bond No. B004529 
	 	$8,530 One-Well Plugging Bond 
		Oil Conservation
      Division 
	 	State AE No. 001 
	 	
	5) 	Bond No. B004530 
	 	$8,530 One-Well Plugging Bond 
		Oil Conservation
      Division 
	 	State AE No. 002 
	 	
	6) 	Bond No. B004531 
	 	$7,493 One-Well Plugging Bond 
		Oil Conservation
      Division 
	 	West Artesia Grayburg Unit No.
      016 
	 	
	7) 	Bond No. B004532 
	 	$7,551 One-Well Plugging Bond 
		Oil Conservation
      Division 
	 	West Artesia Grayburg Unit No.
      022 
	 	 
	8) 	Bond No. B004533 
	 	$7,325 One Well Plugging Bond 
	 	Oil Conservation
      Division 
	 	West Artesia Grayburg Unit No.
      024 







Schedule 7.1(b) 

Authorized Capital Leases

None. 




Schedule 7.5 

Liens and Encumbrances

None. 




Schedule 7.12 

Quarterly Minimum Cumulative Net Operating Cash Flow


  	Calendar Quarter 

        Production Months 
	Net Operating Cash Flow 

        (US$000) - Proposed 

	August 1, 2008 -
        October 31, 2008 	579 
	November 1, 2008 -
        January 31, 2009 	1,133 
	February 1, 2009 -
        April 30, 2009 	1,635 
	May 1, 2009 - July
        31, 2009 	2,145 
	August 1, 2009 -
        October 31, 2009 	2,640 
	November 1, 2009 -
        January 31, 2010 	3,117 
	February 1, 2010 -
        April 30, 2010 	3,552 
	May 1, 2010 - July
        31, 2010 	3,996 
	August 1, 2010 -
        October 31, 2010 	4,429 
	November 1, 2010 -
        January 31, 2011 	4,839 
	February 1, 2011 -
        April 30, 2011 	5,230 
	May 1, 2011 - July
        31, 2011 	5,622 









Schedule 7.13 

Quarterly Minimum Cumulative Production Volumes


  	

        Calendar Quarter 

        Production Months 
	Borrower Net Revenue 

        Interest Production 

        (MBOE) - Proposed 

	August 1, 2008 -
        October 31, 2008 	8.27 
	November 1, 2008 -
        January 31, 2009 	16.31 
	February 1, 2009 -
        April 30, 2009 	23.84 
	May 1, 2009 - July
        31, 2009 	31.47 
	August 1, 2009 -
        October 31, 2009 	38.93 
	November 1, 2009 -
        January 31, 2010 	46.22 
	February 1, 2010 -
        April 30, 2010 	53.10 
	May 1, 2010 - July
        31, 2010 	59.95 
	August 1, 2010 -
        October 31, 2010 	66.67 
	November 1, 2010 -
        January 31, 2011 	73.07 
	February 1, 2011 -
        April 30, 2011 	79.29 
	May 1, 2011 - July
        31, 2011 	85.51