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                                                                    EXHIBIT 10.2

                               SECURITY AGREEMENT

This SECURITY AGREEMENT (this "Agreement") is made and entered into as of July
25, 2005 by and among CANARGO ENERGY CORPORATION, a Delaware corporation (the
"Grantor"), INGALLS & SNYDER VALUE PARTNERS, L.P., and together with the other
Purchasers party hereto and listed in the Schedule 1 attached hereto (in such
capacity, the "Purchasers").

                              W I T N E S S E T H:

WHEREAS, the Grantor and the Purchasers have entered into that certain Note
Purchase Agreement dated as of the date hereof (as amended, restated,
supplemented or otherwise modified from time to time, the "Note Purchase
Agreement"), pursuant to which the Company is issuing on the date hereof
$25,000,000 in aggregate principal amount of its Notes;

WHEREAS, to induce the Purchasers to enter into the Note Purchase Agreement and
to purchase the Notes, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Grantor has agreed
to grant a security interest in the Collateral (as defined below) as security
for the Secured Obligations (as defined below).

WHEREAS, it is a condition precedent to the purchase of the Notes by the
Purchasers thereof that the Grantor shall have granted the security interests
contemplated by this Agreement:

NOW, THEREFORE, to induce the Purchasers to enter into the Note Purchase
Agreement and to purchase the Notes and in consideration of the mutual promises
herein contained and other good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged and confirmed, the Grantor hereby
agree with the Purchasers as follows:

SECTION 1. Definitions. (a) Each capitalized term used herein but not otherwise
defined herein shall have the meaning assigned such term in the Note Purchase
Agreement or, where not defined in the Note Purchase Agreement, terms that are
defined in the Code shall have the respective meanings given to such terms in
the Code.

     (b) In addition, as used herein, the following terms shall have the
following meanings:

"Accounts" means all accounts of the Grantor, including, without limitation, all
present and future accounts, accounts receivable and other rights of the Grantor
to payment for goods sold or leased or for services rendered (except those
evidenced by instruments or Chattel Paper).


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"Chattel Paper" means a record or records (whether written or consisting of
information stored in an electronic medium) that evidence both a monetary
obligation and a security interest in or lease of specific goods including any
license of software used in such goods.

"Code" means the Uniform Commercial Code as in effect in the State of New York.

"Collateral" has the meaning assigned to such term in Section 2.

"Collateral Security" means any Encumbrance, security agreement, guarantee,
indemnity, letter of credit or other obligation (however described) provided or
assumed by any person (including the Grantor) in favor of any Purchaser in
relation to the Secured Obligations, whether generally or to a limited extent
only and whether created or entered into before, on or after the date of this
Security Agreement.

"Contract" means any and all contracts, agreements, commitments, understandings,
leases, licenses, franchises, warranties, guaranties, mortgages, notes, bonds,
hedging agreements, joint operating agreements, production sharing agreements or
other instruments or consensual arrangements (whether written or oral and
whether express or implied) under which the Grantor has or may acquire rights or
by which the Grantor or any of its property or assets is or may become bound, as
any of the foregoing may be amended, supplemented or otherwise modified from
time to time.

"Contract Rights" means all of the Grantor's right, title and interest in and to
each Contract, including, without limitation, (i) all rights of the Grantor to
receive moneys due and to become due under or pursuant to the Contracts; (ii)
all rights of the Grantor to receive proceeds of any insurance, indemnity,
warranty or guaranty with respect to any Contract; (iii) all claims of the
Grantor for damages arising out of, or for breach of, or default under, any
Contract; and (iv) the right of the Grantor to terminate any Contract, to
perform thereunder and to compel performance and otherwise exercise all remedies
thereunder.

"Deposit Accounts" means all demand, time, savings, passbook, or similar bank
accounts maintained with any financial institution, together with all moneys and
funds therein and interest earned thereon and all renewals and replacements
therefor and all certificates and instruments, if any, from time to time
representing such Deposit Accounts or any additions thereto.

"Depositary" means any depositary bank holding a Deposit Account opened or
maintained by the Grantor.

"Documents" means a document of title or a receipt issued by the owner of goods
stored under a statute requiring a bond against withdrawal or a license for the
issuance of receipts in the nature of warehouse receipts.

"Encumbrance" means any mortgage, lien, pledge, charge, security interest or
other encumbrance or any interest or title of any vendor, lessor, lender or
other secured party to

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or of such Person under any conditional sale or other title retention agreement
or Capital Lease upon or with respect to any property or asset of any Person.

"Equipment" means all equipment of the Grantor including, without limitation,
all (i) machinery, plant and pipeline, (ii) manufacturing, distribution,
selling, data processing and office equipment, (iii) furniture, furnishings,
appliances, fixtures and trade fixtures, tools, tooling, molds, dies, vehicles,
vessels, trucks, buses and motor vehicles, (iv) all parts thereof and all
accessions, additions, attachments, improvements, substitutions and replacements
thereto, (v) all software or computer programs embedded in such equipment and
supporting information related to such computer programs, (vi) all operating
equipment and other equipment used in connection with the exploration,
production and processing of hydrocarbons; and (vii) other goods of every type
and description in each case, whether now owned or hereafter acquired.

"Event of Default" has the meaning assigned to such term in the Note Purchase
Agreement.

"General Intangibles" means all general intangibles of the Grantor including,
without limitation, all rights, interests, causes of action, claims, commercial
tort claims, and all other intangible property of the Grantor of every kind and
nature (other than Accounts), including, without limitation, all (i) goodwill,
(ii) service marks, trade secrets, copyrights, copyright applications,
trademarks, trademark applications, trade names, patents, patent applications,
and all registrations and applications therefor, together with the good will
related thereto, (iii) all recorded information of any kind imbedded in any kind
of medium, including software, writings, plans, drawings, and specifications,
corporate and business records, customer lists, credit files and advertising
materials, (iv) reversionary interests in pension or profit sharing plans and
reversionary, beneficial and residual interests in trusts, (v) proceeds of
insurance policies, (vi) tax refunds and claims therefor, and (vii) all
licenses, permits and agreements of any kind pursuant to which the Grantor
possesses, or is authorized to possess or use the property (whether tangible or
intangible) of others or others possess, use or are authorized to possess or use
the property (whether tangible or intangible) of the Grantor and the benefit of
all authorizations and concessions granted in any jurisdiction.

"holders of the Notes" means the Purchasers and any holders of the Notes from
time to time.

"Instruments" means any negotiable instrument or other writing that evidences a
right to the payment of a monetary obligation that is in the ordinary cause of
business transferred by delivery with any necessary endorsement or assignment,
including but not limited to checks and promissory notes but excluding
Investment Property, letters of credit, or writings that evidence a right to
payment arising out of use of a credit or charge card or information contained
on or for use with such card.

"Inventory" means all inventory of the Grantor, including without limitation,
all inventory now owned or hereafter acquired by the Grantor (wherever located,
whether in the possession of the Grantor or of a bailee or other Person for
storage, sale, transit,

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processing, use or otherwise and whether consisting of whole goods, spare parts,
components, supplies, materials, or consigned,returned or repossessed goods)
that are held for sale or lease, which are to be furnished (or have been
furnished) under any contract of service or that are raw materials, work in
process or materials used or consumed in the Grantor's businesses. For purposes
of this Agreement, Inventory shall include any and all hydrocarbons extracted by
the Grantor during the ordinary course of the Grantor's business, for so long as
such hydrocarbons remain in the Grantor's possession.

"Investment Property" means all investment property of the Grantor including,
without limitation, all securities, whether certificated or uncertificated,
stocks, bonds, interests in the capital stock of corporations, interests in
partnerships and limited liability companies, mutual fund shares, annuities,
sums owing to Grantor from any securities intermediary, securities entitlements,
securities accounts, commodity contracts, commodity accounts, instruments,
certificates of deposit, equity interests or investments of any kind.

"Letter-of-Credit Rights" means all rights to payment or performance under a
letter of credit (whether or not evidenced by a writing), whether or not the
beneficiary has demanded or is at the time entitled to demand payment or
performance.

"Other Surety" means any person (other than the Grantor) who is a party to any
Collateral Security.

"Proceeds" means any and all "proceeds," as that term is defined in the Code,
including, without limitation, any and all proceeds of any of the Collateral
including, without limitation, (i) any and all proceeds and products of the
Collateral, all additions and accessions to the Collateral, and all property
received wholly or partly in trade or exchange for the Collateral, (ii) all
leases of the Collateral and rents, revenues, issues, profits, and proceeds
arising in connection with the sale, lease, license, encumbrance, collection or
any other temporary or permanent disposition of the Collateral or any interest
therein, (iii) any and all proceeds of any insurance, indemnity, warranty,
guaranty or other Collateral Security payable to the Grantor from time to time
with respect to any of the Collateral, (iv) any and all payments (in any form
whatsoever) made or due and payable to the Grantor from time to time in
connection with any requisition, confiscation, condemnation, seizure or
forfeiture of all or any part of the Collateral by any governmental authority
(or any Person acting under color of governmental authority), (v) any and all
other amounts from time to time paid or payable under or in connection with any
of the Collateral, (vi) all Deposit Accounts containing such proceeds and (vii)
money.

"Records" means all of the Grantor's books of accounts, ledgers, computer
software, computer printouts and other computerized records and cabinets in
which there are reflected or maintained the Accounts, Inventory, Equipment,
General Intangibles, Deposit Accounts, Letter-of-Credit Rights, Chattel Paper,
Contracts, Documents and Instruments or Investment Property in which the holders
of the Notes have a security interest pursuant to this Security Agreement, and
all supporting evidence and documents

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relating to such security in the form of written applications, credit
information, account cards, payment records, correspondence, delivery and
installation certificates, invoice copies, delivery receipts, notes and other
evidences of indebtedness, insurance certificates and the like.

"Secured Obligations" means all Indebtedness and other monetary obligations of
the Grantor under or in respect of (i) the Loan Documents, whether for principal
at the applicable Redemption Price, interest (including, without limitation,
interest that accrues after the filing of a petition initiating any action or
proceeding under the U.S. Federal Bankruptcy Code or any other bankruptcy,
insolvency or similar law or statute protecting creditors in effect in any
jurisdiction, or is an allowed claim in any such action or proceeding), fees, ,
indemnifications, liabilities, expenses or otherwise, and in each case as
amended, supplemented, modified, extended, restated or renewed, in whole or in
part, from time to time, and without limitation as to amount, terms, conditions,
covenants and other provisions; and (ii) to the extent permitted under the Note
Purchase Agreement, any instrument or other agreement governing Indebtedness or
other monetary obligations of the Grantor incurred to refinance, refund or
replace, in whole or in part, any of the Indebtedness or other monetary
obligations referred to in clause (i) above, together with any related notes,
guarantees, collateral documents, instruments and agreements executed from time
to time in connection therewith.

"Supporting Obligation" means any Letter-of-Credit Right or secondary obligation
that supports the payment or performance of an Account, Chattel Paper, Contract,
Document, General Intangible, Instrument or Investment Property of the Grantor.

"Tangible Personal Property Location" has the meaning specified in Section 5.8.

         (c)      Interpretation; Rules of Construction.  Unless the context
otherwise clearly requires:

         (i)      the definitions of terms herein shall apply equally to the
singular and plural forms of the terms defined;

         (ii)     whenever the context may require, any pronoun shall include
the corresponding masculine, feminine and neuter forms;

         (iii)    the words "include", "includes" and "including" shall be
deemed to be followed by the phrase "without limitation";

         (iv)     the word "will" shall be construed to have the same meaning
and effect as the word "shall";

         (v) any definition of or reference to any agreement, instrument or
other document herein shall be construed as referring to such agreement,
instrument or other document as from time to time amended, supplemented,
restated or otherwise modified (subject to any restrictions on such amendments,
supplements or modifications set forth herein);

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         (vi)     any reference herein to any Person shall be construed to
include such Person's successors and assigns;

         (vii) the words "herein", "hereof" and "hereunder", and words of
similar import, shall be construed to refer to this Security Agreement in its
entirety and not to any particular provision hereof; and

         (viii) all references herein to Sections, Annexes and Exhibits shall be
construed to refer to Sections, Annexes and Exhibits to this Agreement.

SECTION 2. Grant of Security Interest. As collateral security for the prompt
payment in full in cash when due of the Secured Obligations, the Grantor hereby
assigns and pledges to the holders of the Notes a first priority continuing
security interest in, all of its right, title and interest, now owned or at any
time hereafter acquired in and to the following (collectively, the
"Collateral"): (i) all Accounts; (ii) all Inventory; (iii) all Equipment; (iv)
all General Intangibles; (vi) all Chattel Paper; (viii) all Instruments; (viii)
all Deposit Accounts; (ix) all Letter-of-Credit Rights; (x) all Investment
Property; (xi) all Records; (xii) all Proceeds; (xiii) all Supporting
Obligations and (xiv) all Contract Rights.

SECTION 3. Secured Obligations. This Agreement and the grant of a security
interest in the Collateral secure the prompt and complete payment and
performance when due (whether at stated maturity, by acceleration, upon
redemption or otherwise) of all Secured Obligations now or hereafter existing.
Without limiting the generality of the foregoing, this Agreement and the grant
of a security interest in the Collateral hereunder secure, to the fullest extent
permitted by applicable law, the payment of all amounts that constitute part of
the Secured Obligations and that would be owed by the Grantor to the holders
under the Notes or the other Loan Documents but for the fact that they are
unenforceable or not allowable due to the existence of a bankruptcy,
reorganization or similar proceeding involving the Grantor.

SECTION 4.  Representations and Warranties.  As of the date hereof and unless
otherwise expressed below, the Grantor hereby represents and warrants as
follows:

         4.1 The execution and delivery by the Grantor, and the performance by
the Grantor of its obligations under this Agreement will not contravene any
provision of applicable law or the Charter Documents of the Grantor or any
material agreement or other material instrument binding upon the Grantor or any
judgment, order or decree of any Governmental Authority having jurisdiction over
the Grantor, or result in the creation or imposition of any Lien on any assets
of the Grantor, except for the security interests granted under this Agreement
or the other Loan Documents.

         4.2 Subject to compliance with the U.S. Federal Assignment of Claims
Act and any comparable law, statute, rule or regulation of any other
jurisdiction applicable thereto, no consent of any other Person and no approval,
authorization or order of, action by or qualification with, any Governmental
Authority or other third Person is required (i) for the execution, delivery or
performance by the Grantor of its obligations under this

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Agreement which has not been obtained or (ii) for the grant by the Grantor of
the security interests created by this Agreement. Subject to compliance with the
U.S. Federal Assignment of Claims Act and any comparable law, statute, rule or
regulation of any other jurisdiction applicable thereto, no consent of any other
Person and no approval, authorization or order of, action by or qualification
with, any Governmental Authority or other third Person is required for the
exercise by the holders of the rights provided for in this Agreement or the
remedies in respect of the Collateral pursuant to this Agreement.

         4.3 The Grantor is the owner of all of the Collateral, free and clear
of any Lien or other right, title or interest of any Person, other than Liens
permitted pursuant to the terms of Section 11.3 of the Note Purchase Agreement.
No effective financing statement (or similar statements or instrument of
registration under the law of any applicable jurisdiction) is now on file (other
than those filed in favor of the holders of the Notes in connection with this
Security Agreement, the Note Purchase Agreement or any other Loan Document) or
of record in any public office covering or purporting to cover any interest of
any kind in any of the Collateral.

         4.4 This Agreement has been duly authorized, executed and delivered by
the Grantor and constitutes a valid and binding agreement of the Grantor,
enforceable against it in accordance with its terms, except as the
enforceability hereof may be limited by applicable bankruptcy, reorganization,
insolvency, moratorium or similar laws affecting creditors' rights generally or
by equitable principles of general applicability (regardless of whether
enforcement thereof is sought in a proceeding at law or in equity) and
applicable laws of non-U.S. jurisdictions affecting the enforcement of security
interests in the items of Collateral located in such jurisdictions or subject to
the laws thereof.

         4.5 Subject to compliance with the U.S. Federal Assignment of Claims
Act and any comparable law, statute, rule or regulation of any other
jurisdiction applicable thereto, all filings, registrations and recordings
necessary or appropriate to create, preserve, protect and perfect the security
interests granted by the Grantor to the holders of the Notes pursuant to this
Agreement have been accomplished and the security interests granted to the
holders of the Notes pursuant to this Agreement in and to the Collateral
constitute, other than with respect to Liens permitted pursuant to the terms of
Section 11.3 of the Note Purchase Agreement, perfected first-priority security
interests therein (to the extent perfection can be achieved through filing and
to the extent that such security interests and their perfection and priority
status are recognized in the jurisdictions where such Collateral is located or
to whose laws they may be otherwise subject).

         4.6 The Grantor's exact legal name as it appears in its Certificate of
Incorporation is CanArgo Energy Corporation. The Grantor has not, in the past
five years, been incorporated or organized under the laws of any jurisdiction
other than the State of Delaware.

         4.7 The principal executive office of the Grantor is located at Suite
9/10, Borough House, Rue du Pre, Guernsey, GY1 1EF, Channel Islands.

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         4.8 The originals of all documents evidencing Contracts, Accounts and
the original books of account and records relating thereto are kept at the
Grantor's chief executive office or its field offices described in Schedule 2.
All Contracts and Accounts of the Grantor are controlled and monitored
(including, without limitation, for general accounting purposes) from such
location. All tangible Collateral (other than Inventory in transit or in public
warehouses as to which the Grantor has delivered appropriate warehouse receipts)
and all books and records related to any Collateral other than Contracts or
Accounts are kept or located at the Grantor's premises located at the locations
described in Schedule 2.

         4.9 No instrument or certificate evidencing any Deposit Account has
been issued to the Grantor by the respective Depositary, other than a
confirmation advice.

         4.10 All factual information with respect to the Collateral and to the
Grantor's Knowledge the account debtors or account parties set forth in any
schedule, certificate or other writing at any time heretofore or hereafter
furnished by or on behalf of the Grantor or any Affiliate of the Grantor to any
holder of a Note, and all other factual information heretofore or hereafter
furnished by or on behalf of the Grantor to the holders of the Notes, is true
and accurate in every Material respect on the date as of which such information
is dated or certified and the Grantor has not omitted and will not omit any
Material fact necessary to prevent such information, in light of the
circumstances, from being false or misleading.

         4.11 Subject to compliance with the U.S. Federal Assignment of Claims
Act and any comparable law, statute, rule or regulation of any other
jurisdiction applicable thereto, no authorization or approval or other action
by, and no notice to or filing with, any Governmental Authority or regulatory
body or any other third party with jurisdiction is required for (a) the grant by
the Grantor of the security interest granted hereunder or for the execution,
delivery or performance of this Agreement by the Grantor or (b) the perfection
of the security interest created hereunder (including the first priority nature
of such security interest), except for the filing of financing and continuation
statements under the Code and except to the extent that that the creation,
attachment and perfection of such security interests and their priority status
in the jurisdictions where such Collateral is located or pursuant to whose laws
such Collateral may otherwise be subject requires filing, registration or some
other action be taken in such jurisdiction in order to create, attach or perfect
such security interest.

SECTION 5. Covenants. The Grantor covenants and agrees that, until the date on
which the Secured Obligations have been indefeasibly paid in full, unless waived
in writing by the Required Holders:

         5.1 The Grantor shall not sell, offer to sell, assign, lease, rent,
license, or otherwise transfer or dispose of any Collateral or any interest
therein, except in the ordinary course of business or except as specifically
permitted under the terms of the Note Purchase Agreement.

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         5.2 The Grantor shall not (i) create, incur, assume or permit to exist
any Lien, other than Liens permitted pursuant to the terms of Section 11.3 of
the Note Purchase Agreement, on or in respect of any Collateral or any part
thereon or any interest therein. The Grantor shall promptly, at its own expense,
take such action as may be necessary to duly discharge any Lien, other than such
permitted Liens, on or in respect of any Collateral. The Grantor shall not
consign all or any portion of its Inventory to any Person except in the ordinary
course or pursuant to any Basic Documents unless the Required Holders agree in
writing prior to such consignment.

         5.3 Except as may be required under any other Loan Document, the
Grantor shall not execute or authorize to be filed (except in connection with
this Agreement) or registered in any public office any financing statement (or
similar statement or instrument of registration under the law of any
jurisdiction) covering or purporting to cover any interest of any kind in the
Collateral.

         5.4 The Grantor shall not change its name, organizational type,
jurisdiction of organization or organizational identification number without
providing at least 30 days' prior written notice to the holders of the Notes,
which notice shall set forth such new name, organizational type, jurisdiction of
organization or organizational identification number, as applicable, and such
other information in connection therewith as the Required Holders shall
reasonably request.

         5.5 The originals of all documents evidencing Accounts and all of the
books and records relating thereto shall be kept at Grantor's chief executive
office or in a field office identified in Schedule 2. All Accounts of the
Grantor shall be controlled and monitored (including, without limitation, for
general accounting purposes) from such offices. The Grantor shall not establish
a new location for its chief executive office until (i) it has given to the
holders of the Notes not less than 30 days' prior written notice of its
intention so to do, clearly describing such new location and providing such
other information in connection therewith as the Required Holders may reasonably
request, and (ii) it has taken such action with respect to such new location,
reasonably satisfactory to the Required Holders, to cause the security interest
of the holders of the Notes in the Collateral to be at all times fully perfected
and in full force and effect.

         5.6 The Grantor shall not rescind or cancel any indebtedness evidenced
by any Accounts or modify any term thereof or make any adjustment with respect
thereto, or extend or renew the same, or compromise or settle any dispute,
claim, suit or legal proceedings relating thereto, or sell any Accounts or
interest therein, except for rescissions, cancellations, modifications,
adjustments, extensions, renewals, returns, discounts and allowances in the
ordinary course of business or which the Grantor, acting in good faith, deems to
be in the best interests of the Grantor and its business and which could not
reasonably be expected to result in an Event of Default, without the prior
written consent of the Required Holders. The Grantor shall use commercially
reasonable efforts to duly fulfill all obligations on its part to be fulfilled
under or in connection with the Accounts in all Material respects and shall take
no action that could Materially impair the rights of the holders of the Notes in
the Accounts.

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         5.7 The Grantor shall use its commercially reasonable endeavors to
collect from the account obligor of each of its Accounts, as and when due
(including, without limitation, Accounts which are delinquent) any and all
amounts owing under or on account of such Accounts, and apply immediately upon
receipt thereof all such amounts so collected to the outstanding balance of such
Accounts.

         5.8 All tangible Collateral (other than Inventory in transit or in
public warehouses or equipment at its site of manufacture or use, in transit or
at a testing facility) and all books and records related to any Collateral other
than Contracts and Accounts will be kept or located at the Grantor's chief
executive offices or the Grantor's premises described in Schedule 2 (each a
"Tangible Personal Property Location"). The Grantor shall not, without the prior
written consent of the Required Holders, remove such Collateral, books or
records from a Tangible Personal Property Location or keep the Collateral at any
other locations except as a result of the testing, manufacture, use, sale,
replacement or other disposition of such Collateral in accordance with this
Agreement or the Note Purchase Agreement. The Grantor shall not establish a new
Tangible Personal Property Location until (i) it has given to the holders of the
Notes not less than 30 days' prior written notice of its intention so to do,
clearly describing such new location and such other information in connection
therewith as the Required Holders may reasonably request, and (ii) with respect
to such new location, it has taken such commercially reasonable action,
reasonably satisfactory to the Required Holders, to cause the security interest
of the holders of the Notes in all Collateral consisting of personal property
other than Accounts to be at all times fully perfected and in full force and
effect.

         5.9 The Grantor shall maintain, preserve and protect all tangible
Collateral in saleable condition and in working order and condition (ordinary
wear and tear excepted), shall not use the Collateral in any manner outside the
ordinary course of its business or in Material violation of any applicable law
or policy of insurance thereon and, as quickly as practicable after the
occurrence of any Material loss or damage to such tangible Collateral, make or
cause to be made all necessary repairs, replacements and other improvements in
connection therewith reasonably necessary or appropriate to restore such
Collateral as reasonably close to the status in which such Collateral existed
prior to any such loss or damage as practicable and promptly furnish the holders
of the Notes with a written notice. The Grantor shall notify the holders of the
Notes of any Material loss or damage of any Collateral.

         5.10 The Grantor shall keep and maintain at its own cost and expense
complete books of record and account in which true and correct entries in
conformity with generally accepted applicable accounting principles and all
Material requirements of law shall be made of all dealings and transactions
related to the Collateral. Without limiting the generality of the foregoing, the
Grantor shall keep and maintain at its own cost and expense reasonably
satisfactory and complete records of each Account for at least three years from
the date on which such Account comes into existence, including, but not limited
to, records of all payments received, all credits granted thereon, all
merchandise returned and all other documentation relating thereto. The Grantor
shall permit officers and designated representatives of the holders of the Notes
to visit and inspect any of the

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properties of the Grantor, during normal business hours, to examine the books of
record and account (whether written or electronic) of the Grantor, and to
discuss the affairs, finances and accounts of the Grantor with the Grantor's
officers, employees and consultants, all at the cost and expense of the holders
of the Notes unless and until an Event of Default has occurred and is continuing
and thereafter all such costs and expenses shall be at Grantor's expense, upon
reasonable advance written notice to the Grantor unless and until an Event of
Default has occurred and is continuing.

         5.11 The Grantor will maintain with insurers which on the date the
policy commences are financially sound and reputable, insurance with respect to
the Collateral against such casualties and contingencies, of such types, on such
terms and in such amounts (including deductibles, co-insurance and
self-insurance, if adequate reserves are maintained with respect thereto) as is
customary in the case of entities of established reputations engaged in the same
or a similar business and similarly situated.

         5.12 In the event that any goods (excluding Hydrocarbons and goods
covered by a document of title) are in the possession of a Person other than the
Grantor, the holders of the Notes or a lessee, the Grantor shall forthwith
notify the holders of the Notes and obtain from such Person an executed
agreement, in form and substance reasonably satisfactory to the Required
Holders, acknowledging that it is holding such goods for the holders of the
Notes' benefit. The Grantor shall ensure that all warehouse receipts or receipts
in the nature of warehouse receipts issued with respect to any of its Inventory
(excluding Hydrocarbons) are non-negotiable.

         5.13 After an Event of Default has occurred and is continuing, upon
acquiring or holding any certificated securities, the Grantor shall immediately
endorse, assign and deliver the same to the securities intermediary, accompanied
by such instruments of transfer or assignment duly executed in blank as the
securities intermediary may from time to time reasonably specify. After an Event
of Default has occurred and is continuing, if any uncertificated securities now
or hereafter acquired by the Grantor are issued to the Grantor or its nominee
directly by the issuer thereof, the Grantor shall promptly notify the holders of
the Notes thereof and, at the Required Holders' reasonable request and option,
pursuant to an agreement in form and substance reasonably satisfactory to the
Required Holders, either (a) cause the issuer to agree to comply with
instructions from the Required Holders as to such securities, without further
consent of the Grantor or such nominee, or (b) arrange for a securities
intermediary to become the custodian of the securities. If any securities,
whether certificated or uncertificated, or other investment property now or
hereafter acquired by the Grantor are held by the Grantor or its nominee through
a securities intermediary or commodity intermediary, the Grantor shall
immediately notify the holders of the Notes thereof and, at the Required
Holders' reasonable request and option, pursuant to an agreement in form and
substance reasonably satisfactory to the Required Holders and the Grantor,
either (i) cause such securities intermediary or commodity intermediary (as the
case may be) to agree to comply with entitlement orders or other instructions
from the Required Holders to such securities intermediary with respect to such
securities or other investment property, after an Event of Default has occurred
and is continuing or, after an Event of Default has

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occurred and is continuing, to apply any value distributed on account of any
commodity contract as directed by the Required Holders to such commodity
intermediary, in each case without further consent of the Grantor or such
nominee, or (ii) after an Event of Default has occurred and is continuing, in
the case of financial assets or other investment property held through a
securities intermediary, arrange for the holders of the Notes to become
entitlement holders with respect to such investment property, with the Grantor
being permitted, after an Event of Default has occurred and is continuing, only
with the consent of the Required Holders, to exercise rights to withdraw or
otherwise deal with such investment property. The provisions of this paragraph
shall not apply to any financial assets credited to a securities account for
which any holder of a Note is the securities intermediary.

         5.14 The Grantor shall not create any Chattel Paper (whether tangible
or electronic) representing a monetary obligation in excess of US$1,000,000
without placing a legend on such Chattel Paper indicating that the holders of
the Notes have a security interest in such Chattel Paper, and all existing
Chattel Paper shall be so legended.

         5.15 In the event that the Grantor is at anytime a beneficiary under a
letter of credit with a face amount in excess of US$1,000,000 now or hereafter
issued in favor of the Grantor, the Grantor shall promptly notify the holders of
the Notes thereof and, at the request of the Required Holders, the Grantor
shall, pursuant to an agreement in form and substance satisfactory to the
Required Holders, arrange for the issuer, confirmer and any other nominated
security agent of such letter of credit to consent to a security interest in the
Proceeds of such letter of credit as collateral security for the Secured
Obligations.

         5.16 In the event that the Grantor shall at any time have a Material
tort claim involving a claimant that is an organization or an individual, where
such claim arose not in the ordinary course in a business context and does not
involve damages based on death or personal injury, the Grantor shall immediately
provide the holders of the Notes with a written summary of such claim and shall
grant to the holders of the Notes a security interest therein and in the
Proceeds thereof in a manner reasonably satisfactory to the Required Holders.

         5.17 The Grantor will not re-incorporate, re-form or re-organize itself
under the law of a different jurisdiction, or change its name as appears on the
public records of its jurisdiction of incorporation, formation or organization,
without giving the holders of the Notes not less than 30 days prior written
notice and, at the request of the Required Holders, promptly taking such
reasonable action as the Required Holders may request to maintain the perfection
of the security interests created by this Agreement.

SECTION 6.  Further Assurances.

         6.1 The Grantor agrees that from time to time, it will, at its own
expense, promptly upon reasonable request by the Required Holders, consistent
with the provisions of this Agreement execute and deliver or cause to be
executed and delivered, or use its commercially reasonable efforts to procure,
all assignments, instruments and

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<PAGE>

other documents, all in form and substance reasonably satisfactory to the
Required Holders, deliver any instruments to the holders and take any other
actions that may be necessary or, in the reasonable opinion of the Required
Holders, desirable to perfect, continue the perfection of, or protect the first
priority of the holders' security interest in and to the Collateral, to protect
the Collateral against the rights, claims, or interests of third Persons (other
than any such rights, claims or interests created by or arising through the
holders) or to effect the purposes of this Agreement in a manner consistent
therewith.

         6.2 The Grantor hereby authorizes the Required Holders acting on behalf
of and in their capacity as holders to file any financing or continuation
statements with respect to the Collateral without the signature of Grantor (to
the extent permitted by applicable law); provided, however, that Grantor shall
not be relieved of any of its obligations under Section 6.1 or 6.4 hereof. A
photocopy or other reproduction of this Agreement or any financing statement
covering the Collateral or any part thereof shall be sufficient as a financing
statement where permitted by law. Copies of any such financing or continuation
statements with respect to the Collateral shall be furnished to the Grantor as
soon as practicable after any such filing.

         6.3 The Grantor will furnish to the holders of the Notes from time to
time statements and schedules further identifying and describing the Collateral
and such other reports in connection with the Collateral as the Required Holders
may reasonably request, all in reasonable detail.

         6.4 The Grantor will promptly pay all costs and expenses reasonably
incurred in connection with any of the foregoing within 60 days of receipt of an
invoice therefor. The Grantor also agrees, whether or not requested by the
Required Holders, to take or cause to be taken all commercially reasonable
actions that are necessary to perfect and to continue the perfection of, and to
protect the first priority of, the holders of the Notes' security interest in
and to the Collateral, including the filing of all necessary financing and
continuation statements, and to protect the Collateral against the rights,
claims or interests of third Persons (other than any such rights, claims or
interests created by or arising through the holders).

         6.5 The Grantor hereby irrevocably authorizes the Required Holders on
behalf of and in their capacity as holders at any time and from time to time to
file in any Uniform Commercial Code jurisdiction any initial financing
statements and amendments thereto that (x) indicate the Collateral as being of
an equal or lesser scope or with greater detail, and (y) contain any other
information required by part 5 of Article 9 of the Uniform Commercial Code of
the appropriate jurisdiction for the sufficiency or filing office acceptance of
any financing statement or amendment; provided that the Required Holders shall
have no obligation to perform any of the foregoing actions other than those
expressly provided herein or in the Loan Documents, and; provided, further, that
copies of all such initial financing statements and amendments thereto shall be
furnished to the Grantor promptly after any such filing.

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SECTION 7. Power of Attorney. In addition to all of the powers granted to the
holders of the Notes pursuant to the Loan Documents, the Grantor hereby appoints
and constitutes the Required Holders, as Grantor's attorney-in-fact (with full
power of substitution and delegation), with full authority in the place and
stead of the Grantor and in the name of the Grantor or otherwise, acting in
their reasonable discretion, from and after the occurrence and during the
continuance of an Event of Default, to take any action and to execute any
instrument that the Required Holders may deem necessary or advisable to
accomplish the purposes of this Agreement, provided copies of all such executed
instruments are furnished to the Grantor promptly after their execution, filing
and/or delivery, including, without limitation:

         (a) to ask for, demand, collect, sue for, recover, compromise, receive
and give acquittance and receipt for moneys due and to become due under or in
respect of any of the Collateral,

         (b) to receive, indorse and collect any drafts or other instruments,
documents and chattel paper,

         (c) to file any claims or take any action or institute any proceedings
that the Required Holders may reasonably deem necessary or desirable for the
collection of any of the Collateral or otherwise to enforce the rights of the
holders with respect to any of the Collateral, and

         (d) to pay or discharge any taxes or liens levied or placed upon the
Collateral, the legality or validity thereof and the amounts necessary to
discharge the same all as determined by the Required Holders in their sole
discretion, it being understood that any such payments made by the holders of
the Notes shall become part of the Secured Obligations, and shall be due and
payable immediately upon demand; provided, however, that the Required Holders
shall have no obligation to perform any of the foregoing actions. The authority
under this Section 9 shall include, without limitation, the authority to endorse
and negotiate any checks or instruments representing proceeds of Collateral in
the name of the Grantor, execute and give receipt for any certificate of
ownership or any document constituting Collateral, transfer title to any item of
Collateral, authorize the filing of any financing statements (to the extent
permitted by applicable law) or any other documents reasonably deemed necessary
or appropriate by the Required Holders to preserve, protect or perfect the
security interest in the Collateral and to file the same, prepare, file and sign
Grantor's name on any notice of Lien, and to take any other actions arising from
or incident to the powers granted to the holders of the Notes in this Agreement.
This power of attorney is coupled with an interest and is irrevocable by the
Grantor.

SECTION 8. Indemnity. The Grantor shall indemnify, hold harmless and defend the
holders of the Notes and each of their respective directors, officers, agents
and employees, from and against any and all claims, actions, obligations,
liabilities, damages and expenses, actually incurred, including, without
limitation, defense costs, investigative fees and costs, and reasonable legal
fees, arising from their execution of or performance

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<PAGE>

under this Agreement, except to the extent that such claim, action, obligation,
liability or expense is directly attributable to the bad faith, gross negligence
or willful misconduct of such indemnified person. This indemnification shall
survive the termination of this Agreement until after the expiration of all
applicable statutes of limitation periods.

SECTION 9. Remedies Upon Event of Default. If any Event of Default shall have
occurred and be continuing the holders of the Notes shall have, in addition to
any other rights and remedies provided for in the Note Purchase Agreement or any
other Loan Document, all of the rights and remedies of a secured party under the
Code. Without limiting the generality of the foregoing, upon the occurrence of
an Event of Default, the holders of the Notes shall have in addition to all
other rights and remedies available in any relevant jurisdiction, the rights and
remedies set forth below:

         (a) The Required Holders shall be entitled to take possession of and
prepare the Collateral for sale on behalf of the holders of the Notes until the
Collateral is disposed of, or may propose to retain the Collateral or transfer
the Collateral in satisfaction of the Secured Obligations.

         (b) The Required Holders may require the Grantor to assemble all or any
part of the Collateral and make the Collateral available for possession at any
place or places to be designated by the Required Holders in their reasonable
discretion.

         (c) The Required Holders or their agent shall have the right to enter
upon the premises of the Grantor without any obligation to pay rent to the
Grantor, or any other place or places where the Collateral is located and kept,
or to remove all or any part of the Collateral therefrom to premises maintained
by or on behalf of the Required Holders, or any of their agents, for such time
as the Required Holders may desire, in order to effectively collect or liquidate
the Collateral on behalf of the holders of the Notes.

         (d) Unless the Collateral is perishable or threatens to decline
speedily in value or is of a type customarily sold on a recognized market, the
Required Holders shall give at least ten days prior written notice to the
Grantor of the time and place of any public sale thereof or of the time after
which any private sale or other intended disposition thereof is to be made. The
Grantor acknowledges and agrees that ten days prior written notice of such sale
or sales shall constitute reasonable notice.

         (e) Any holder of a Note may buy the Collateral or any part thereof at
any public sale, and, if the Collateral is of a type customarily sold on a
recognized market or is of a type which is subject to widely distributed
standard price quotations, any holder of a Note may buy all or any part of such
Collateral at a private sale. The net proceeds realized upon any such
disposition of the Collateral, after deduction for the expenses of retaking,
holding, preparing for sale or lease, selling, leasing and the like, and the
reasonable attorney's fees and legal expenses incurred by such Required Holders
in connection therewith, shall be applied in satisfaction of the Secured
Obligations in such order as the Required Holders in their sole discretion may
elect. The Required Holders

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<PAGE>

shall account to the Grantor for any surplus realized on such disposition and
the Grantor shall remain liable for any deficiency.

         (f) With respect to any Deposit Account, securities account or
commodity account, the Required Holders acting on behalf of the holders of the
Notes shall have the right to deliver instructions to the Depositary, securities
intermediary, commodity intermediary or any other financial intermediary or
entity at which such account is maintained, to cease honoring all instructions
or entitlement orders related to such account from the Grantor or its
representatives, to deliver such Collateral to the Required Holders or their
agent for the ratable benefit of the holders of the Notes, and/or to apply any
money, funds or other property or assets deposited or credited to or within such
account as directed by the Required Holders, including, without limitation,
instructions to liquidate any or all property or assets deposited or credited to
or within such account and to pay and release to the holders of the Notes any or
all amounts on deposit, credited to or within such account.

         (g) With respect to any Contract, the Required Holders, acting on
behalf of and for the ratable benefit of the holders of the Notes, shall have
the right, but not the obligation, to exercise any and all rights and remedies
of the Grantor under or in connection with such Contract, including, without
limitation, any and all rights of the Grantor to demand or otherwise require
payment of any amount under, or performance of any provision of, any Contract,
and the Grantor hereby irrevocably designates, makes, constitutes and appoints
such Required Holders (and all other parties designated by the Required Holders)
as the Grantor's true and lawful agents and attorneys-in-fact, with power,
without notice to the Grantor, in the Grantor's or the holders of the Notes'
names to take any of the actions outlined in Section 7(a), (b), (c) and (d). The
Grantor agrees that, upon the occurrence and continuation of an Event of
Default, it shall instruct each other party to each Contract that any and all
payments due or to become due to the Grantor under or in connection with such
Contract shall be made directly to the account indicated by the Required
Holders.

         (h) The remedies of the holders of the Notes hereunder are cumulative
and the exercise of any one or more of the remedies provided for herein, under
the Note Purchase Agreement, any other Loan Document, or under the Code shall
not be construed as a waiver of any of the other remedies of the holders of the
Notes (including the equitable right of set-off), so long as any part of the
Secured Obligations shall remain unsatisfied and the Note Purchase Agreement
remains in effect.

SECTION 10.  Standards for Exercising Remedies.

         To the extent that applicable law imposes duties on the holders of the
Notes (including, without limitation, the Required Holders) to exercise remedies
in a commercially reasonable manner, the Grantor acknowledges and agrees that it
is not commercially unreasonable for the holders of the Notes, except under
circumstances that constitute willful misconduct, bad faith or gross negligence,
(a) to fail to incur expenses reasonably deemed significant by the Required
Holders to prepare Collateral for

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<PAGE>

disposition or otherwise to complete raw material or work in process into
finished goods or other finished products for disposition, (b) to fail to obtain
third party consents for access to Collateral to be disposed of, or to obtain
or, if not required by other law, to fail to obtain governmental or third party
consents for the collection or disposition of Collateral to be collected or
disposed of, (c) to fail to exercise collection remedies against account debtors
or other persons obligated on Collateral or to remove liens or encumbrances on
or any adverse claims against Collateral, (d) to exercise collection remedies
against account debtors and other persons obligated on Collateral specialists,
(e) to advertise dispositions of Collateral through publications or media of
general circulation, whether or not the Collateral is of a specialized nature,
(f) to contact other persons, whether or not in the same business as the
Grantor, for expressions of interest in acquiring all or any portion of the
Collateral, (g) to hire one or more professional auctioneers to assist in the
disposition of Collateral, whether or not the Collateral is of a specialized
nature, (h) to dispose of Collateral by utilizing internet sites that provide
for auction of assets of the types included in the Collateral or that have the
reasonable capability of doing so, or that match buyers and sellers of assets,
(i) to dispose of assets in wholesale rather than retail markets, (j) to
disclaim disposition warranties, (k) to purchase insurance or credit
enhancements to insure the holders of the Notes against risks of loss,
collection or disposition of Collateral or to provide to the holders of the
Notes a guaranteed return from the collection or disposition of Collateral, or
(l) to the extent deemed appropriate by the Required Holders, to obtain the
services of other brokers, investment bankers, consultants and other
professionals to assist the Required Holders in the collection or disposition of
any of the Collateral on behalf and for the ratable benefit of the holders of
the Notes. The Grantor acknowledges that the purpose of this section is to
provide non-exhaustive indications of what actions or omissions by the holders
of the Notes would be commercially reasonable in the holders of the Notes'
exercise of remedies against the Collateral and that other actions or omissions
by the holders of the Notes shall not be deemed commercially unreasonable solely
on account of not being indicated herein. Without limitation upon the foregoing,
nothing contained in this Agreement shall be construed to grant any rights to
the Grantor or to impose any duties on the holders of the Notes that would not
have been granted or imposed by this Agreement or by applicable law in the
absence of this Section 10.


SECTION 11. Expenses. Subject to any limitations set forth in the Loan
Documents, the Grantor will promptly upon demand pay to the holders of the Notes
the amount of any and all reasonable expenses, including, without limitation,
the reasonable fees, expenses and disbursements of counsel, experts and agents
retained by the holders of the Notes, that the holders of the Notes may incur in
connection with (a) the review, negotiation and administration of this
Agreement, (b) the custody or preservation of, or the sale of, collection from,
or other realization upon, any of the Collateral, (c) the exercise or
enforcement of any of the rights of the holders hereunder or (d) the failure by
the Grantor to perform or observe any of the provisions hereof.

SECTION 12.  Miscellaneous Provisions.

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Section 12.1. Notices. Any notice or other communication given hereunder shall
be sufficiently given if in writing and delivered in the manner provided in
Section 19 of the Note Purchase Agreement addressed:

         (a) If to the Grantor, then as set forth in Section 19 of the Note
Purchase Agreement.

         (b) If to the holders of the Notes, then as set forth in Section 19 of
the Note Purchase Agreement.

All such notices and other communications shall, when mailed, delivered or
telecopied, respectively, be effective when deposited in the mails, delivered or
telecopied, respectively, addressed as aforesaid.

Section 12.2. No Adverse Interpretation of Other Agreements. This Agreement may
not be used to interpret another pledge, security or debt agreement of the
Grantor or any Subsidiary thereof. No such pledge, security or debt agreement
(other than the Loan Documents) may be used to interpret this Agreement.

Section 12.3. Severability. The provisions of this Agreement are severable, and
if any clause or provision shall be held invalid, illegal or unenforceable in
whole or in part in any jurisdiction, then, to the fullest extent permitted by
law, such invalidity or unenforceability shall affect in that jurisdiction only
such clause or provision, or part thereof, and shall not in any manner affect
such clause or provision in any other jurisdiction or any other clause or
provision of this Agreement in any jurisdiction.

Section 12.4. Headings. The headings in this Agreement have been inserted for
convenience of reference only, are not to be considered a part hereof and shall
in no way modify or restrict any of the terms or provisions hereof.

Section 12.5. Counterpart Originals. This Agreement may be signed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
together constitute one and the same agreement.

Section 12.6. Benefits of Agreement. Nothing in this Agreement, express or
implied, shall give to any Person, other than the parties hereto and any holders
of the Notes and their successors hereunder, any benefit or any legal or
equitable right, remedy or claim under this Agreement.

Section 12.7. Amendments, Waivers and Consents. Any amendment or waiver of any
provision of this Agreement and any consent to any departure by the Grantor from
any provision of this Agreement shall be effective only if made or duly given in
compliance with all of the terms and provisions of the Loan Documents, and then
such waiver or consent shall be effective only in the specific instance and for
the specific purpose for which given, provided that an amendment or supplement
to this Agreement may be entered into by the Grantor without the consent of all
the holders of the Notes, so long as

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<PAGE>

such amendment or supplement is reasonably satisfactory in form and substance to
the Grantor and the Required Holders. No amendment or waiver of any provision of
this Agreement, and no consent to any departure by the Grantor herefrom, shall
in any event be effective unless the same shall be made in writing by the
Grantor and the Required Holders. No holder of a Note shall be deemed, by any
act, delay, indulgence, omission or otherwise, to have waived any right or
remedy hereunder or to have acquiesced in any Event of Default or in any breach
of any of the terms and conditions hereof. Failure of any holder of a Note to
exercise, or delay in exercising, any right, power or privilege hereunder shall
not preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. A waiver by any holder of a Note of any right or
remedy hereunder on any one occasion shall not be construed as a bar to any
right or remedy that such holder would otherwise have on any future occasion.
The rights and remedies herein provided are cumulative, may be exercised singly
or concurrently and are not exclusive of any rights or remedies provided by law.

Section 12.8. Interpretation of Agreement. To the fullest extent permitted by
applicable law, acceptance of or acquiescence in a course of performance
rendered under this Agreement shall not be relevant to determine the meaning of
this Agreement even though the accepting or acquiescing party had knowledge of
the nature of the performance and opportunity for objection.

Section 12.9.  Continuing Security Interest; Termination.

(a) This Agreement shall create a continuing security interest in and to the
Collateral and shall, unless otherwise provided in this Agreement, remain in
full force and effect until the indefeasible payment in full in cash of the
Secured Obligations. This Agreement shall be binding upon the Grantor, its
transferees, successors and assigns, and shall inure, together with the rights
and remedies of the holders of the Notes hereunder, to the benefit of the
holders of the Notes and their respective successors, transferees and assigns.

(b) This Agreement (other than Grantor's obligations under and to the extent
provided in Sections 8 and 11) shall terminate upon the indefeasible payment in
full in cash of the Secured Obligations. At such time, the holders of the Notes
shall promptly transfer to the Grantor or Grantor's designee all of the
Collateral hereunder that has not been sold, disposed of, retained or applied by
or on behalf of the holders in accordance with the terms of this Agreement and
the Loan Documents and take all other actions that are necessary to release the
security interest created by this Agreement in and to the Collateral, including
the execution and delivery of all termination statements necessary to terminate
any financing or continuation statements filed with respect to the Collateral.

Section 12.10. Survival of Representations and Covenants. All representations,
warranties and covenants of the Grantor contained herein shall survive the
execution and delivery of this Agreement and the termination of this Agreement
until after the indefeasible payment of all Secured Obligations.

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Section 12.11. Waivers. The Grantor, to the fullest extent permitted by
applicable law, waives presentment and demand for payment of any of the
Obligations, protest and notice of dishonor or default with respect to any of
the Obligations, and all other notices to which the Grantor might otherwise be
entitled, except as otherwise expressly provided herein or in the Loan
Documents.

Section 12.12. Final Expression. This Agreement, together with the other Loan
Documents and any other agreement executed in connection herewith or therewith,
is intended by the parties hereto and thereto as a final expression of this
Agreement and is intended as a complete and exclusive statement of the terms and
conditions thereof.

Section 12.13. Rights of Holders of the Notes. No holder of a Note shall have
any independent rights hereunder other than those rights granted to individual
holders of the Notes pursuant to the Loan Documents; provided that nothing in
this subsection shall limit any rights granted to the holders of the Notes under
this Agreement or the other Loan Documents.

Section 12.14. Governing Law; Submission to Jurisdiction; Waiver of Jury Trial;
Waiver of Damages.

         (a) THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH, AND THIS
AGREEMENT AND ALL MATTERS ARISING OUT OF OR RELATING IN ANY WAY WHATSOEVER
(WHETHER IN CONTRACT, TORT OR OTHERWISE) TO THIS AGREEMENT SHALL BE GOVERNED BY,
THE LAW OF THE STATE OF NEW YORK.

         (b) FOR ANY SUIT, ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT,
THE GRANTOR HEREBY AGREES TO SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF ANY
FEDERAL OR STATE COURT LOCATED IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW
YORK, STATE OF NEW YORK.

         (c) THE GRANTOR AGREES THAT THE REQUIRED HOLDERS SHALL, IN THEIR
CAPACITY AS HOLDERS OR IN THE NAME AND ON BEHALF OF ANY HOLDER, HAVE THE RIGHT,
TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW (AND TO THE EXTENT THE
REQUIRED HOLDERS HAVE RECEIVED INDEMNITY DEEMED SATISFACTORY TO THEM AND HAVE
AGREED TO DO SO), TO PROCEED AGAINST THE GRANTOR OR THE COLLATERAL IN A COURT IN
ANY LOCATION REASONABLY SELECTED IN GOOD FAITH (AND HAVING PERSONAL OR IN REM
JURISDICTION OVER THE GRANTOR OR THE COLLATERAL, AS THE CASE MAY BE) TO ENABLE
THE SECURED PARTIES TO REALIZE ON SUCH COLLATERAL, OR TO ENFORCE A JUDGMENT OR
OTHER COURT ORDER ENTERED IN FAVOR OF THE SECURED PARTIES. THE GRANTOR AGREES,
TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THAT IT WILL NOT ASSERT ANY
COUNTERCLAIMS, SETOFFS OR CROSSCLAIMS IN ANY PROCEEDING

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<PAGE>

BROUGHT BY THE SECURED PARTIES TO REALIZE ON SUCH PROPERTY OR TO ENFORCE A
JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE SECURED PARTIES, EXCEPT FOR SUCH
COUNTERCLAIMS, SETOFFS OR CROSSCLAIMS WHICH, IF NOT ASSERTED IN ANY SUCH
PROCEEDING, COULD NOT OTHERWISE BE BROUGHT OR ASSERTED. THE GRANTOR WAIVES, TO
THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY OBJECTION THAT THEY MAY HAVE
TO THE LOCATION OF THE COURT IN THE CITY OF NEW YORK IN THE BOROUGH OF MANHATTAN
ONCE THE REQUIRED HOLDERS HAVE COMMENCED A PROCEEDING DESCRIBED IN THIS
PARAGRAPH INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR
BASED ON THE GROUNDS OF FORUM NON CONVENIENS.

         (d) THE GRANTOR AGREES THAT NO HOLDER OF A NOTE (EXCEPT AS OTHERWISE
PROVIDED IN THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS) SHALL HAVE ANY LIABILITY
TO THE GRANTOR (WHETHER ARISING IN TORT, CONTRACT OR OTHERWISE) FOR LOSSES
SUFFERED BY THE GRANTOR IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY
RELATED TO, THE TRANSACTIONS CONTEMPLATED AND THE RELATIONSHIP ESTABLISHED BY
THIS AGREEMENT, OR ANY ACT, OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH,
UNLESS SUCH LOSSES WERE THE RESULT OF ACTS OR OMISSIONS ON THE PART OF THE
SECURED PARTIES CONSTITUTING BAD FAITH, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.

SECTION 13. Reinstatement. This Agreement and the Liens created hereunder shall
automatically be reinstated if and to the extent that for any reason any payment
by or on behalf of the Grantor in respect of the Secured Obligations is
rescinded or must otherwise be restored by any holder, whether as a result of
any proceedings in bankruptcy or reorganization or otherwise, and Grantor shall
indemnify the holders on demand for all reasonable costs and expenses
(including, without limitation, reasonable fees and expenses of counsel)
incurred by the holders in connection with such rescission or restoration.

SECTION 14. No Third Party Beneficiaries. Nothing in this Agreement, express or
implied, shall be construed to confer upon any Person (other than the parties
hereto, the holders of the Notes, their respective successors and assigns
permitted hereby and, to the extent expressly contemplated hereby, the
directors, officers, employees and Affiliates of the holders) any legal or
equitable right, remedy or claim under or by reason of this Agreement.

Section 15. Waiver of Jury Trial. EACH PARTY HERETO HEREBY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING
TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON

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<PAGE>

CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO
REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY
OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK
TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER
PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

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<PAGE>

IN WITNESS WHEREOF, the Grantor and the Purchasers have each caused this
Agreement to be duly executed and delivered as of the date first above written.

                                            CANARGO ENERGY CORPORATION

                                            By:
                                                --------------------------------
                                                Name:
                                                Title:

                                            THE PURCHASERS:

                                            INGALLS & SNYDER VALUE
                                            PARTNERS L.P.

                                            By:
                                                --------------------------------
                                                Thomas O. Bouchar Jr.
                                                General Partner


                                            NIKOLAOS D. MONOYIOS

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


                                            THOMAS L. GIPSON

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



                                            ARTHUR KOENIG

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



                                            THOMAS L. GIPSON IRA

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



                                            EVAN JANOVIC

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



                                       S-1
                                                           NY Security Agreement



<PAGE>

                                            ARTHUR ABLIN

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




                                            FLEDGLING ASSOCIATES, LLC
                                            BY: HARTZ TRADING, INC., MANAGER

                                            ------------------------------------
                                            Edward Stern
                                            President



                                            ADAM JANOVIC

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



                                            NEIL JANOVIC

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



                                            ANTHONY CORSO

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



                                            JOHN GILMER

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



                                            MARTIN SOLOMON

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


                                       S-2
                                                           NY Security Agreement


<PAGE>

                                   SCHEDULE I

THE PURCHASERS:


INGALLS & SNYDER VALUE PARTNERS L.P.

NIKOLAOS D. MONOYIOS

THOMAS L. GIPSON

ARTHUR KOENIG

THOMAS L. GIPSON IRA

EVAN JANOVIC

ARTHUR ABLIN

FLEDGLING ASSOCIATES, LLC

ADAM JANOVIC

NEIL JANOVIC

ANTHONY CORSO

JOHN GILMER

MARTIN SOLOMON


                                                           NY Security Agreement


<PAGE>

                                   SCHEDULE 2

                                  FIELD OFFICES

16 Bordage
St Peter Port
Guernsey
GY1 1BD

150 Buckingham Palace Road
London
SW1W 9TR

69 Tole bi Street, Office 10
Almaty 050000
Kazakhstan

Ninotsminda Re Office, CanArgo Norio Limited Rep Office, CanArgo Samgori Limited
Rep Office and CanArgo (Nazvrevi) Ltd Rep Office - 4-a Freedom Square, Tbilisi
0105, Georgia.

CanArgo Georgia - 70 Kostava Street, Tbilisi 0171, Georgia.



                                                           NY Security Agreement