<PAGE>
                                                                    EXHIBIT 10.7


                           CANARGO ENERGY CORPORATION


                              INGALLS & SNYDER LLC

                                       AND

                               THE SECURED PARTIES













                           SECURITY INTEREST AGREEMENT
                                 (BANK ACCOUNT)







                                      ABX

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                                    CONTENTS

<Table>


<S>   <C>                                                              <C>
1     DEFINITIONS AND INTERPRETATION....................................1

2     GRANT OF SECURITY INTEREST........................................5

3     THE SECURED OBLIGATIONS...........................................5

4     DEBTOR'S REPRESENTATIONS AND WARRANTIES...........................6

5     DEBTOR'S COVENANTS................................................8

6     AUTHORITY.........................................................8

7     EVENTS OF DEFAULT.................................................9

8     ENFORCEMENT BY THE SECURED PARTIES...............................12

9     FURTHER ASSURANCE AND POWER OF ATTORNEY..........................14

10    SET-OFF..........................................................14

11    REDESIGNATION OF ACCOUNT.........................................15

12    SUSPENSE ACCOUNT.................................................15

13    SECURITY CONTINUING AND INDEPENDENT..............................15

14    REMEDIES AND WAIVER..............................................16

15    FEES, COSTS AND EXPENSES.........................................16

16    INDEMNITY AND LIABILITY..........................................16

17    RULING OFF.......................................................17

18    ILLEGALITY.......................................................18

19    CERTIFICATE OF SECURED PARTIES...................................18

20    AMALGAMATION AND CONSOLIDATION...................................18

21    CONVERSION OF CURRENCY...........................................18

22    AMENDMENT........................................................18

23    ASSIGNMENT.......................................................19

24    NOTICES..........................................................19

25    COUNTERPARTS.....................................................20

26    GOVERNING LAW AND JURISDICTION...................................20

SCHEDULE 1 ............................................................23

SCHEDULE 2 ............................................................25
</Table>


<PAGE>



                           SECURITY INTEREST AGREEMENT

THIS AGREEMENT is made on                                                   2005

BETWEEN

(1)      CANARGO ENERGY CORPORATION a company incorporated under the laws of
         Delaware, having its registered office at 2711, Centreville Road, Suite
         400, Wilmington, Delaware, 19808 USA (the "DEBTOR");

(2)      INGALLS & SNYDER LLC a company formed under the laws of New York having
         its office at 61 Broadway, New York, New York, USA as agent for the
         Secured Parties (the "SECURITY AGENT"); and

(3)      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 all care of 61 Broadway, New York,
         NY 10006, USA as the purchasers (together the "SECURED PARTIES").

WHEREAS:

This Agreement is made between the parties hereto for the purposes of creating
security over certain bank accounts of the Debtor at the Account Bank (as
defined herein)

NOW IT IS HEREBY AGREED AS FOLLOWS:

1        DEFINITIONS AND INTERPRETATION

1.1      In this Agreement, the following words and expressions shall, except
         where the context otherwise requires, have the following meanings:

         "ACCOUNTS" means the Debtor's bank accounts numbered 011-660859-360 and
         011-660859-202 at the Account Bank and any sub-account or any
         substituted account;

         "ACCOUNT BALANCES" means all sums at any time and from time to time
         standing to the credit of the Accounts and includes all interest
         accrued or accruing in the future thereon and any monies of the Debtor
         at the Account Bank (however described,


                                       1
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         designated or numbered) which derives in whole or in part from the
         Accounts or from any sum at any time standing to the credit of the
         Accounts;

         "ACCOUNT BANK" means HSBC Bank Plc of PO Box 31, 13 High Street, St.
         Peter Port, Guernsey;

         "AFFILIATE" has the meaning ascribed to it in the Note Purchase
         Agreement;

         "BUSINESS DAY" means any day on which commercial banks are open for
         full banking business in Guernsey;

         "CANARGO GROUP MEMBER" has the meaning ascribed to it in the Note
         Purchase Agreement;

         "CODE" has the meaning ascribed to it in the Note Purchase Agreement;

         "COLLATERAL" means the whole right, title, benefit and interest,
         present and future, of the Debtor in and under the Accounts and the
         Account Balances and all other income, interest and rights deriving
         from or incidental to the foregoing;

         "DEFAULT" has the meaning ascribed to it in the Note Purchase
         Agreement;

         "ENCUMBRANCE" means any mortgage, charge, pledge, lien, assignment,
         hypothecation, title retention, security interest, trust arrangement or
         any other agreement or arrangement which has the effect of creating
         security;

         "ERISA" has the meaning ascribed to it in the Note Purchase Agreement;

         "ERISA AFFILIATE" has the meaning ascribed to it in the Note Purchase
         Agreement;

         "EVENTS OF DEFAULT" means any of the events or circumstances specified
         in Clause 7;

         "FOREIGN PENSION PLAN" has the meaning ascribed to it in the Note
         Purchase Agreement;

         "KNOWLEDGE" has the meaning ascribed to it in the Note Purchase
         Agreement;

         "LAW" means the Security Interests (Guernsey) Law, 1993;

         "LIEN" has the meaning ascribed to it in the Note Purchase Agreement;


                                       2
<PAGE>


         "LOAN DOCUMENTS" has the meaning ascribed to it in the Note Purchase
         Agreement;

         "MATERIAL" shall have the meaning ascribed to it in the Note Purchase
         Agreement;

         "MATERIAL ADVERSE EFFECT" has the meaning ascribed to it in the Note
         Purchase Agreement;

         "MULTIEMPLOYER PLAN" has the meaning ascribed to it in the Note
         Purchase Agreement;

         "NOTE PURCHASE AGREEMENT" means the note purchase agreement dated as of
         the date hereof between the Debtor and the Secured Parties;

         "NOTES" mean the senior secured notes issued to the Secured Parties
         pursuant to the Note Purchase Agreement;

         "OBLIGATIONS" has the meaning ascribed to it in the Note Purchase
         Agreement;

         "PERSON" has the meaning ascribed to it in the Note Purchase Agreement;

         "PLAN" has the meaning ascribed to it in the Note Purchase Agreement;

         "PROPERTIES" has the meaning ascribed to it in the Note Purchase
         Agreement;

         "REDEMPTION PRICE" has the meaning ascribed to it in the Note Purchase
         Agreement;

         "REQUIRED HOLDERS" means, at any time, the holders of at least 51% in
         principal amount of the Notes at the time outstanding (exclusive of
         Notes then owned by the Debtor, any of its Subsidiaries or any of its
         Affiliates);

         "RESPONSIBLE OFFICER" has the meaning ascribed to it in the Note
         Purchase Agreement;

         "SECURED OBLIGATIONS" shall have the meaning given to it in Clause 3;

         "SECURITY DOCUMENTS" has the meaning ascribed to it in the Note
         Purchase Agreement;

         "SECURITY PERIOD" means the period commencing on the date hereof and
         terminating on the date upon which the Required Holders shall have
         determined that all of the


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         Secured Obligations have been irrevocably and indefeasibly paid,
         performed and discharged in full; and

         "SUBSIDIARY" has the meaning ascribed to it in the Note Purchase
         Agreement.

1.2      The Secured Parties shall be the "SECURED PARTIES", the Debtor shall be
         the "DEBTOR" and the Events of Default shall be the "EVENTS OF DEFAULT"
         for the purposes of the Law.

1.3      References to the Secured Parties include their successors and assigns.
         References to the Debtor include its successors and permitted assigns,
         if any.

1.4      Words and expressions not otherwise defined in this Agreement shall be
         construed in accordance with the Law.

1.5      Except where the context otherwise requires, words denoting the
         singular include the plural and vice versa, words denoting a gender
         include every gender and references to persons include bodies corporate
         and unincorporate.

1.6      References to Recitals, Clauses and Schedules are, unless the context
         otherwise requires, references to recitals and clauses hereof and
         schedules hereto and references to sub-clauses are, unless otherwise
         stated, references to the sub-clause of the clause in which the
         reference appears.

1.7      The Recitals and Schedule form part of this Agreement and shall have
         the same force and effect as if they were expressly set out in the body
         of this Agreement and any reference to this Agreement shall include the
         Recitals and Schedule.

1.8      Any reference to this Agreement or to any agreement or document
         referred to in this Agreement shall be construed as a reference to such
         agreement or document as amended, varied, modified, supplemented,
         restated, novated or replaced from time to time.

1.9      Any reference to any statute or statutory provision shall, unless the
         context otherwise requires, be construed as a reference to such statute
         or statutory provision as the same may have been or may be amended,
         modified, extended, consolidated, re-enacted or replaced from time to
         time.


                                       4
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1.10     Clause headings and the index are inserted for convenience only and
         shall not affect the construction of this Agreement.

2        GRANT OF SECURITY INTEREST

2.1      Without affecting, and in addition to, each Secured Party's other
         rights under or pursuant to this Agreement, for the purpose of granting
         each Secured Party a first priority security interest in the Collateral
         pursuant to the Law, the Debtor hereby assigns the Collateral to the
         Security Agent for the ratable benefit of the Secured Parties.

2.2      Upon the expiry of the Security Period, the Security Agent shall, at
         the request and expense of the Debtor, assign, transfer or otherwise
         make over title to the Collateral to the Debtor, without recourse or
         warranty, executing such documents as may be required to release the
         security created by this Agreement and shall thereby discharge the
         security created hereunder.

3        THE SECURED OBLIGATIONS

         The grant of security interest set out in Clause 2.1 shall secure the
         Debtor's obligation under the Note Purchase Agreement as a continuing
         security for the payment and/or discharge of, the Notes and of all
         other present or future obligations, monies and liabilities of the
         Debtor to the Secured Parties which shall for the time being (and
         whether on or at any time after such demand) be or become due, owing or
         incurred to any Secured Party by the Debtor whether actually or
         contingently, solely or jointly with any other person or as principal
         or surety and including interest (whether simple or compound and as
         well after as before judgment) together with discount, commission and
         all other lawful charges and expenses (including, without limitation,
         legal fees and other professional fees plus disbursements) of the
         Secured Parties under the Note Purchase Agreement (together the
         "SECURED OBLIGATIONS").


                                       5
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4        DEBTOR'S REPRESENTATIONS AND WARRANTIES

         The Debtor hereby represents and warrants to each Secured Party on the
         date hereof that:

         (a)      the Debtor is a body corporate duly incorporated and validly
                  existing under the laws of Delaware and all corporate and
                  other action required to authorise the execution and delivery
                  of this Agreement and the perfection of the security intended
                  to be created hereunder has been duly taken;

         (b)      this Agreement constitutes the legal, valid and binding
                  obligations of the Debtor, and constitutes a valid first
                  priority security interest in the Collateral under the Law,
                  enforceable against the Debtor in accordance with its terms;

         (c)      no event has occurred or circumstance exists which constitutes
                  or with the giving of notice or lapse of time or both would
                  constitute an Event of Default;

         (d)      the Debtor is the sole legal and beneficial owner of and has
                  good title to the Collateral subject only to the rights
                  granted in favour of the Secured Parties by this Agreement and
                  save as permitted under the Note Purchase Agreement including
                  without limitation the security interest agreement between the
                  Debtor and HSBC International Limited dated February 2, 2005;

         (e)      save as permitted under the Note Purchase Agreement including
                  without limitation the security interest agreement between the
                  Debtor and HSBC International Limited dated February 2, 2005,
                  the Collateral is free from all Encumbrances and rights of
                  set-off other than those created by this Agreement in favour
                  of the Secured Parties;

         (f)      the Debtor has the necessary power to execute, deliver and
                  perform its obligations under this Agreement; and the
                  execution, delivery and performance by the Debtor of this
                  Agreement and the consummation of the transactions
                  contemplated hereby have been duly authorized by all necessary
                  corporate action;

         (g)      all necessary authorisations or approvals or other actions by
                  and notices or filings with any governmental authority,
                  regulatory body or any other third


                                       6
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                  party to enable the Debtor to execute, deliver and perform
                  this Agreement and the perfection of the security interest
                  created hereunder have been obtained and are in full force and
                  effect;

         (h)      the execution, delivery and performance by the Debtor of this
                  Agreement and the consummation by the Debtor of the
                  transactions contemplated hereby do not:

                  (i)      require any consent or approval of any Person that
                           has not been obtained and each such consent or
                           approval that has been obtained is in full force and
                           effect;

                  (ii)     violate any provision of the Certificate of
                           Incorporation or By-laws of the Debtor;

                  (iii)    violate any provision of any statute, regulation,
                           order, injunction or judgement applicable to the
                           Debtor which violation could reasonably be expected
                           to have a Material Adverse Effect; or

                  (iv)     violate, result in a breach of or constitute a
                           default under any mortgage, indenture or any other
                           material agreement to which the Debtor is a party or
                           by which it or its property may be bound which
                           violation or breach could reasonably be expected to
                           have a Material Adverse Effect.

         (i)      there are no actions, suits, litigation, administrative
                  proceedings or other proceedings at law or in equity or by or
                  before any governmental authority or arbitral tribunal now
                  pending, or to the Knowledge of the Debtor, threatened against
                  or affecting the Collateral which could reasonably be expected
                  to have a Material Adverse Effect.


                                       7
<PAGE>


5        DEBTOR'S COVENANTS

         The Debtor covenants and undertakes to the Secured Parties that:

         (a)      contemporaneously with the execution and delivery of this
                  Agreement it shall deliver to the Account Bank a notice
                  materially in the form set out in Part I of the Schedule.

         It shall not, save with the prior written consent of the Required
         Holders:

                  (i)      in any way, except as set out in this Agreement or in
                           the Note Purchase Agreement, create an Encumbrance
                           over the Collateral or any part thereof; or

                  (ii)     after the occurrence of an Event of Default which is
                           continuing negotiate, settle or waive any claim for
                           loss, damage or other compensation affecting the
                           Collateral or any part thereof;

         (b)      it shall do everything in its power to prevent any person from
                  becoming entitled to claim any right over the Collateral or
                  any part thereof; and

         (c)      it shall do everything necessary to permit the Security Agent:

                  (i)      to confirm or protect the interests of the Secured
                           Parties in the Collateral; and

                  (ii)     to exercise any of its or the Secured Parties' rights
                           under this Agreement.

6        AUTHORITY


6.1      Notwithstanding any other provisions hereof, until the occurrence of an
         Event of Default which is thereafter continuing unremedied and
         unwaived, the Debtor shall be free, at any time and from time to time,
         to withdraw all or any part of the Account Balances and the Security
         Agent shall act and exercise all rights in respect of the Collateral,
         including withdrawing any part or all of the Account Balances, only
         upon the written instructions of the Debtor.


                                       8
<PAGE>


         At any time following the occurrence of an Event of Default which is
         continuing, except with the written authorisation of the Required
         Holders:

         (a)      the Debtor shall not be authorised to, and shall not, give
                  instructions or exercise its rights in respect of the
                  Collateral; and

         (b)      the Security Agent shall act and exercise its rights in
                  respect of the Collateral, including withdrawing any part or
                  all of the Account Balances, only upon the written
                  instructions of the Required Holders.

7        EVENTS OF DEFAULT

         There shall be an Event of Default if there occurs or exists any event
         described as or constituting an Event of Default under the Note
         Purchase Agreement namely:

         (a)      the Debtor defaults in the payment of any principal at the
                  applicable Redemption Price (if any) on any Note when the same
                  becomes due and payable, whether at maturity or at a date
                  fixed for prepayment or by declaration or otherwise; or

         (b)      the Debtor defaults in the payment of any interest on any Note
                  or in the payment of any expenses due hereunder or under any
                  Security Document for more than five Business Days after the
                  same becomes due and payable; or

         (c)      the Debtor defaults in the performance of or compliance with
                  any term contained in sections 9.6, 10.11, 11.2, 11.3, 11.4,
                  11.6, 11.7, 11.8, 11.9, 11.10 or 11.11 of the Note Purchase
                  Agreement (an extract of such sections from the Note Purchase
                  Agreement are set out in Schedule 2 hereof); or

         (d)      the Debtor defaults in the performance of or compliance with
                  any term contained in the Note Purchase Agreement (other than
                  those referred to in paragraphs (a), (b) and (c) above) and
                  such default is not remedied within 30 days after the earlier
                  of (i) a Responsible Officer obtaining actual and not
                  constructive knowledge of such default and (ii) the Debtor
                  receiving written notice of such default from any holder of a
                  Note (any such written notice to be identified as a "notice of
                  default" and to refer specifically to paragraph (d) of Section
                  12 of the Note Purchase Agreement); or


                                       9
<PAGE>


         (e)      any representation or warranty made in writing by or on behalf
                  of the Debtor or any other CanArgo Group Member or by any
                  officer of the Debtor or any other CanArgo Group Member in the
                  Note Purchase Agreement, in any Security Document or in
                  writing furnished in connection with the transactions
                  contemplated hereby proves to have been false or incorrect in
                  any Material respect on the date as of which made; or

         (f)      the Debtor or any other CanArgo Group Member (i) is generally
                  not paying, or admits in writing its inability to pay, its
                  debts as they become due, (ii) files, or consents by answer or
                  otherwise to the filing against it of, a petition for relief
                  or reorganization or arrangement or any other petition in
                  bankruptcy, for liquidation or to take advantage of any
                  bankruptcy, insolvency, reorganization, moratorium or other
                  similar law of any jurisdiction, (iii) makes an assignment for
                  the benefit of its creditors, (iv) consents to the appointment
                  of a custodian, receiver, trustee or other officer with
                  similar powers with respect to it or with respect to any
                  substantial part of its property, (v) is adjudicated as
                  insolvent or to be liquidated, or (vi) takes corporate action
                  for the purpose of any of the foregoing; or

         (g)      a court or governmental authority of competent jurisdiction
                  enters an order appointing a custodian, receiver, trustee or
                  other officer with similar powers with respect to it or with
                  respect to any substantial part of its property, or
                  constituting an order for relief or approving a petition for
                  relief or reorganization or any other petition in bankruptcy
                  or for liquidation or to take advantage of any bankruptcy or
                  insolvency law of any jurisdiction, or ordering the
                  dissolution, winding-up or liquidation of the Debtor or any
                  other CanArgo Group Member, or any such petition shall be
                  filed against the Debtor or any other CanArgo Group Member and
                  such petition shall not be dismissed or stayed pending appeal
                  within 90 days, or are not discharged within 60 days after the
                  expiration of such stay; or

         (h)      a final judgment or judgments for the payment of money
                  aggregating in excess of US$2,500,000 (to the extent not
                  covered by insurance) are rendered against the Debtor or any
                  other CanArgo Group Member and which judgments are not, within
                  90 days after entry thereof, bonded, discharged, finally
                  settled or


                                       10
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                  stayed pending appeal, or are not discharged within 60 days
                  after the expiration of such stay; or

         (i)      if (i) any Plan subject to ERISA shall fail to satisfy the
                  minimum funding standards of ERISA or the Code for any plan
                  year or part thereof or a waiver of such standards or
                  extension of any amortization period is sought or granted
                  under section 412 of the Code, (ii) a notice of intent to
                  terminate any Plan subject to ERISA shall have been or is
                  reasonably expected to be filed with the Pension Benefit
                  Guaranty Corporation referred to and defined in ERISA or any
                  successor thereto ("PBGC") or the PBGC shall have instituted
                  proceedings under ERISA section 4042 to terminate or appoint a
                  trustee to administer any such Plan or the PBGC shall have
                  notified the Debtor or any ERISA Affiliate or other Affiliate
                  that a Plan subject to ERISA may become a subject of any such
                  proceedings, (iii) the aggregate "amount of unfunded benefit
                  liabilities" (within the meaning of section 4001(a)(18) of
                  ERISA) under all Plans subject to ERISA, determined in
                  accordance with Title IV of ERISA shall exceed US$500,000,
                  (iv) the Debtor or any ERISA Affiliate or other Affiliate
                  shall have incurred or is reasonably expected to incur any
                  liability pursuant to Title I or IV of ERISA or the penalty or
                  excise tax provisions of the Code relating to employee benefit
                  plans subject to ERISA in excess of $500,000, (v) the present
                  value of the accrued benefit liabilities (whether or not
                  vested) under each Foreign Pension Plan maintained by the
                  Debtor or an ERISA Affiliate, determined as of the end of its
                  most recently ended fiscal year on the basis of actuarial
                  assumptions, each of which is reasonable, exceeds the current
                  value of the assets of such Foreign Pension Plan allocable to
                  such benefit liabilities by US$500,000 or more, (vi) either
                  the Debtor or any other CanArgo Group Member incurs a Material
                  liability pursuant to any Foreign Pension Plan which could
                  reasonably be expected to have a Material Adverse Effect,
                  (vii) the Debtor or any ERISA Affiliate or other Affiliate
                  withdraws from any Multiemployer Plan, or (viii) the Debtor or
                  any other CanArgo Group Member establishes or amends any
                  employee welfare benefit plan that provides post-employment
                  welfare benefits in a manner that would increase the liability
                  of the Debtor or any other CanArgo Group Member thereunder in
                  any Material respect and any such event or


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                  events described in clauses (i) through (viii) above, either
                  individually or together with any other such event or events,
                  has a Material Adverse Effect;

         (j)      (i) the Note Purchase Agreement, the 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 the Debtor, any Affiliate of the
                  Debtor or any of their respective partners or shareholders;
                  (ii) the Debtor denies that it has any further liability or
                  obligation under any of the Loan Documents prior to the
                  indefeasible satisfaction in full of all Obligations under the
                  Loan Documents; or (iii) any of the Liens and security
                  interest granted to the Secured Parties under the Security
                  Documents cease to be valid or perfected or cease to have the
                  priority required hereby or under the Security Documents prior
                  to the indefeasible satisfaction in full of all Obligations
                  under the Loan Documents, other than as a result of the action
                  or omission by any of the Secured Parties or holder; or

         (k)      the Debtor or any other CanArgo Group Member modifies or
                  amends any of its constitutional documents in any Material
                  manner without the Required Holders' prior written consent,
                  unless any such amendment will not result in a Default or
                  Event of Default (without regard to this paragraph) and will
                  not adversely affect the rights of the holders under the Loan
                  Documents; or

         (l)      a change occurs in the consolidated financial condition of the
                  Debtor or in the physical, operational or financial status of
                  the Properties, which change is not otherwise described in
                  this section and has a Material Adverse Effect and which has
                  not been remedied pursuant to paragraph (d) above.

8        ENFORCEMENT BY THE SECURED PARTIES

8.1      At any time following the occurrence of an Event of Default which is
         thereafter continuing unremedied and unwaived and provided that the
         Security Agent has served on the Debtor a notice specifying the
         particular Event of Default complained of:

         (a)      the power of sale or application under the Law shall become
                  exercisable over the Collateral without any order of the Royal
                  Court of Guernsey;


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         (b)      the power of sale or application may be exercised in such
                  manner and for such consideration (whether payable
                  immediately, by instalments or otherwise deferred) as the
                  Required Holders shall in their absolute discretion determine
                  and, in particular, the Required Holders shall be entitled to
                  appropriate the Account Balances and apply the same in
                  accordance with the Law;

         (c)      for the purposes of this Agreement, references to the exercise
                  of the "POWER OF SALE OR APPLICATION" shall include any method
                  or process by which value is given, allowed or credited by the
                  Required Holders for the Collateral against the Secured
                  Obligations;

         (d)      the Security Agent, acting upon the written instructions of
                  the Required Holders, may exercise and be entitled to any and
                  all rights of an owner of the Collateral subject hereto; and

         (e)      the Security Agent may, acting upon the written instructions
                  of the Required Holders, collect, receive or compromise and
                  give a good discharge for any and all monies and claims for
                  monies due and to become due for the time being comprised in
                  the Collateral subject hereto.

8.2      Neither the Security Agent nor the Required Holders shall be under any
         liability to the Debtor for any failure to apply and distribute the
         monies representing the proceeds of sale or application of the
         Collateral in accordance with the Law if the Required Holders direct
         the Security Agent to apply and distribute such proceeds in good faith
         without further enquiry and in accordance with the information
         expressly known to them at the time of the application and
         distribution.

8.3      The exercise by the Secured Parties of any right or power of sale or
         application under this Clause 8 shall not constitute a waiver or
         release of nor the exercise of any other right or power of sale or
         application held by any Secured Party unless expressly stated in
         writing.

8.4      For the purposes of this Clause 8, time shall be of the essence with
         regard to the performance by the Debtor of the Secured Obligations.


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9        FURTHER ASSURANCE AND POWER OF ATTORNEY

9.1      The Debtor agrees that it shall from time to time upon the written
         request of the Required Holders promptly do all such things and execute
         and deliver all such instruments and documents (including, without
         limitation, any replacement or supplemental security) as the Required
         Holders may consider necessary or desirable for creating the security
         contemplated hereby, giving full effect to this Agreement or for
         securing or protecting the rights of the Secured Parties hereunder.

9.2      In accordance with the Powers of Attorney and Affidavits (Bailiwick of
         Guernsey) Law, 1995 (the "POWERS OF ATTORNEY LAW"), for the purpose of
         facilitating the exercise of the powers of the Secured Parties under
         the Law and the powers given pursuant to this Agreement, the Debtor
         hereby irrevocably appoints the Security Agent, acting upon the written
         instructions of the Required Holders, as the Debtor's true and lawful
         attorney (with full power of substitution and delegation) with
         authority in the name of and on behalf of the Debtor upon the
         occurrence of an Event of Default which is continuing to sign, execute,
         seal, deliver, complete, acknowledge, file, register and perfect any
         and all assurances, documents, transfers, instruments, agreements,
         certificates and consents whatsoever and to do any and all such acts
         and things in relation to any matters dealt with in this Agreement and
         which the Required Holders may deem necessary or advisable in order to
         give full effect to this Agreement (including, without limitation,
         anything referred to in Clause 8 (Enforcement by the Secured Parties))
         and anything to perfect the Secured Parties' security over the
         Collateral. The Debtor further covenants with the Secured Parties to
         ratify and confirm any lawful exercise or purported exercise of this
         power of attorney.

10       SET-OFF

         Without affecting and in addition to the grant of security interest and
         the other rights of the Secured Parties under or pursuant to this
         Agreement, the Security Agent may, upon the written instructions of the
         Required Holders, at any time after the occurrence of an Event of
         Default which is continuing set off the Account Balances in or towards
         the discharge of the Secured Obligations and such right of set off may
         be exercised by the Security Agent, upon the written instructions of
         the Required Holders, at any time after the occurrence of an Event of
         Default which is continuing without any prior


                                       14
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         notice to the Debtor, provided that the Security Agent shall notify the
         Debtor of any exercise of such right of set off.

11       REDESIGNATION OF ACCOUNT

         The Debtor agrees that, if for any reason any of the Accounts is
         redesignated or renumbered, all of the terms of this Agreement shall
         apply to the redesignated or renumbered account as if all sums at any
         time standing to the credit of the redesignated or renumbered account
         form part of the Account Balances.

12       SUSPENSE ACCOUNT

         All monies received, recovered or realised by the Security Agent under
         this Agreement may, at the discretion of the Required Holders, be
         credited to a separate or suspense account for so long as the Required
         Holders may think fit without any intermediate obligation on the part
         of the Secured Parties or the Security Agent to apply the same in or
         towards payment and discharge of the Secured Obligations.

13       SECURITY CONTINUING AND INDEPENDENT

         The security constituted by this Agreement:

         (a)      shall not be discharged by any partial or intermediate payment
                  or performance of the Secured Obligations;

         (b)      shall take effect as a security for the whole and every part
                  of the payment or performance of the Secured Obligations and
                  shall be independent of and in addition to, and it shall not
                  be prejudiced or be affected by and shall not affect or
                  prejudice, any other security now or hereafter held by any
                  Secured Party in respect of the payment or performance of all
                  or any part of the Secured Obligations; and

         (c)      shall not be in any way discharged, impaired or otherwise
                  affected by reason of any of the Secured Obligations becoming
                  illegal, void, voidable, invalid or unenforceable or by reason
                  of any other act, circumstance or omission which might but for
                  provisions of this Clause constitute a discharge of such
                  security.


                                       15
<PAGE>


14       REMEDIES AND WAIVER

         Time shall be of the essence of this Agreement but no failure by the
         Security Agent or any Secured Party to exercise, nor any delay by the
         Security Agent or any Secured Party in exercising, any right or remedy
         hereunder shall operate as a waiver hereof nor shall any single or
         partial exercise prevent any further or other exercise thereof or the
         exercise of any other right or remedy. The rights and remedies provided
         herein are cumulative and not exclusive of any rights or remedies
         provided by law, which may be exercised at the Required Holders'
         discretion.

15       FEES, COSTS AND EXPENSES

15.1     Subject to the provisions of Section 10.9 of the Note Purchase
         Agreement, the Debtor agrees to reimburse the Security Agent on demand
         for all fees (including legal fees), costs and expenses incurred by the
         Security Agent in connection with or relating to the negotiation,
         preparation and/or execution of this Agreement, the creation,
         preservation and/or enforcement of any of the Secured Party's rights
         under this Agreement or the exercise or purported exercise of any of
         the powers arising pursuant to this Agreement.

15.2     All such fees, costs and expenses shall be reimbursed by the Debtor on
         a full indemnity basis.

16       INDEMNITY AND LIABILITY

16.1     The Debtor will indemnify and keep indemnified the Secured Parties and
         the Security Agent and/or its nominees (if any) on demand against each
         and every loss, action, claim, expense, cost and liability which the
         Secured Parties and the Security Agent and/or its nominees may incur
         (as holder of the Collateral) or which may be properly incurred in or
         in connection with the preservation and/or enforcement of any of the
         Secured Parties rights under this Agreement or flowing from the
         exercise or purported exercise of any of the powers arising under any
         of the provisions of this Agreement save where such loss, action,
         claim, expense, cost or liability arises as the result of the gross
         negligence or wilful misconduct of the Security Agent or any of the
         Secured Parties.


                                       16
<PAGE>


16.2     Without prejudice to any other provision hereof:

         (a)      the obligations of the Security Agent to the Secured Parties
                  and to the Debtor shall not be and/or shall be deemed not to
                  be fiduciary in nature;

         (b)      the provisions of the Trusts (Guernsey) Law, 1989 shall not
                  apply to the Security Agent in respect of its duties under
                  this Agreement; and

         (c)      the obligations of the Security Agent to the Secured Parties
                  and to the Debtor shall be limited to (a) its obligations as
                  expressed in this Agreement and (b) acting in accordance with
                  the written authorisation of the Required Holders, where such
                  authorisation is required.

16.3     Notwithstanding any other provision hereof neither the Security Agent
         nor its nominees nor any of the Secured Parties shall be liable by
         reason of (a) taking any action permitted by this Agreement, (b) any
         neglect or default in connection with the Collateral or (c) the taking
         possession or realisation of all or any part of the Collateral, except
         in the case of gross negligence or wilful default upon their part.

17       RULING OFF

         In the event of the affairs of the Debtor being declared en etat de
         desastre or the commencement of any form of bankruptcy or insolvency
         proceeding affecting the Debtor or of all or any part of this Agreement
         ceasing for any reason to be binding on the Debtor or if the Security
         Agent receives notice (actual or otherwise) of any other or subsequent
         Encumbrance affecting the Collateral, the Required Holders may at any
         time rule off the Debtor's obligations and then subsisting account or
         accounts of the Debtor with the Secured Parties and open a new account
         or accounts in the name of the Debtor. No monies paid in respect of
         such new account or accounts shall thereby discharge or reduce the
         amount recoverable pursuant to this Agreement. If the Required Holders
         in any of the above cases do not rule off the obligations of the Debtor
         or open any new account or accounts, it shall nevertheless be treated
         as if they had done so at the time when they first had notice (actual
         or otherwise) of the event in question and all payments made by or on
         behalf of the Debtor to the Security Agent for the rateable benefit of
         the Secured Parties shall be treated as having been credited


                                       17
<PAGE>


         to the new account or accounts and shall not operate to reduce the
         amount recoverable pursuant to this Agreement.

18       ILLEGALITY

         If at any time one or more of the provisions of this Agreement becomes
         invalid, illegal or unenforceable in any respect, that provision shall
         be severed from the remainder and the validity, legality and
         enforceability of the remaining provisions of this Agreement shall not
         be affected or impaired in any way.

19       CERTIFICATE OF SECURED PARTIES

         Any certificate submitted by the Security Agent to the Debtor as to the
         amount of the Debtor's obligations or any part of them shall (in the
         absence of manifest error) be conclusive and binding on the Debtor at
         the relevant time.

20       AMALGAMATION AND CONSOLIDATION

         The rights and benefits of each Secured Party under this Agreement
         shall remain valid and binding for all purposes notwithstanding any
         change, amalgamation, consolidation, migration or otherwise which may
         be made in the constitution of such Secured Party and shall be
         available to such entity as shall carry on the business of that Secured
         Party for the time being.

21       CONVERSION OF CURRENCY

         All monies received or held by the Security Agent subject to this
         Agreement may at any time, after the occurrence of an Event of Default,
         be converted into such other currency as the Required Holders consider
         necessary or desirable to satisfy the Secured Obligations in that other
         currency at the then prevailing spot rate of exchange of the Account
         Bank (as conclusively determined by the Required Holders) for
         purchasing that other currency with the original currency.

22       AMENDMENT

         No variation or amendment of this Agreement shall be valid unless in
         writing and signed by or on behalf of Debtor and the Security Agent
         acting upon written instructions of the Required Holders.


                                       18
<PAGE>


23       ASSIGNMENT

23.1     Any Secured Party at any time may grant a participation in or make an
         assignment or transfer or otherwise dispose of, the whole or any part
         of its rights and benefits under this Agreement. Subject to the
         provisions of Section 21 of the Note Purchase Agreement for the purpose
         of any such participation, assignment, transfer or disposal, the
         Security Agent may disclose information about the Debtor and the
         financial condition of the Debtor as may have been made available to
         the Security Agent by the Debtor or which is otherwise publicly
         available.

23.2     Except with the written consent of the Required Holders, the Debtor
         shall not assign or transfer all or any part of its rights, benefits
         and/or obligations under this Agreement.

24       NOTICES

         All notices with respect to this Agreement shall be delivered by hand
         or sent by first class post to the address of the addressee as set out
         in this Agreement with respect to the Security Agent or Section 19 in
         the Note Purchase Agreement or to such other address as the addressee
         may from time to time have notified for the purpose of this Clause 24
         or to any other "PROPER ADDRESS" as defined in the Law, or sent by
         facsimile transmission ("FAX") and shall be deemed to have been
         received:

         (a)      if sent by first class prepaid post, five Business Days after
                  posting;

         (b)      if delivered by hand, on the day of delivery; and

         (c)      if sent by fax, at the time of transmission provided that the
                  sender shall receive a successful transmission report.

         If the Debtor is a body corporate registered outside the Island of
         Guernsey, it shall appoint a process agent in the Island of Guernsey to
         accept service of notices pursuant to this Agreement on its behalf,
         such appointment to take effect from the date of this Agreement, and it
         shall promptly notify the Security Agent in writing of the identity and
         address of such process agent from time to time.


                                       19
<PAGE>


25       COUNTERPARTS

         This Agreement may be executed in any number of counterparts each of
         which shall be an original but which shall together constitute one and
         the same instrument.

26       GOVERNING LAW AND JURISDICTION

26.1     This Agreement shall be governed by and construed in accordance with
         the laws of the Island of Guernsey and the parties hereby irrevocably
         agree for the exclusive benefit of the Secured Parties that the courts
         of the Island of Guernsey are to have jurisdiction to settle any
         disputes which arise out of or in connection with this Agreement and
         that accordingly any suit, action or proceeding arising out of or in
         connection with this Agreement (in this Clause referred to as
         "PROCEEDINGS") may be brought in such court.

26.2     Nothing contained in this Clause shall limit the right of any Secured
         Party to take Proceedings against the Debtor or the Company in any
         other court of competent jurisdiction nor shall the taking of
         proceedings in one or more jurisdiction preclude the taking of
         Proceedings in any other jurisdiction, whether concurrently or not.

26.3     The Debtor irrevocably waives (and irrevocably agrees not to raise) any
         objection which either may have now or hereafter to laying of the venue
         of any Proceedings in any such court as referred to in this Clause and
         any claim that any such Proceedings have been brought in an
         inconvenient forum and further irrevocably agree that a judgment in any
         Proceedings brought in any such court as is referred to in this Clause
         shall be conclusive and binding upon the Debtor and may be enforced in
         the court of any other jurisdiction.

AS WITNESS WHEREOF have caused this Agreement to be duly executed the day and
year first above written.



                                       20
<PAGE>




SIGNED for and on behalf of
INGALLS & SNYDER LLC
by:

Name:
                                                  ------------------------------

Title:



SIGNED for and on behalf of
CANARGO ENERGY CORPORATION
by:

Name:
                                                  ------------------------------

Title:



SIGNED for and on behalf of
INGALLS & SNYDER VALUE
PARTNERS L.P.
by:

Name:
                                                  ------------------------------

Title:



SIGNED by
NIKOLAOS D MONOYIOS
                                                  ------------------------------


SIGNED by
THOMAS L GIPSON
                                                  ------------------------------
SIGNED by
ARTHUR KOENIG

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


SIGNED by
THOMAS L GIPSON IRA
                                                  ------------------------------



                                       21
<PAGE>



SIGNED by
EVAN JANOVIC
                                                  ------------------------------



SIGNED by
ARTHUR ABLIN
                                                  ------------------------------



SIGNED for and on behalf of
FLEDGLING ASSOCIATES LLC
by:

Name:
                                                  ------------------------------

Title:



SIGNED by
ADAM JANOVIC
                                                  ------------------------------



SIGNED by
NEIL JANOVIC
                                                  ------------------------------



SIGNED by
ANTHONY CORSO
                                                  ------------------------------



SIGNED by
JOHN GILMER
                                                  ------------------------------



SIGNED by
MARTIN SOLOMON
                                                  ------------------------------


                                       22
<PAGE>





                                   SCHEDULE 1





TO:       HSBC BANK PLC, PO BOX 31, 13 HIGH STREET, ST PETER PORT, GUERNSEY

          (the "ACCOUNT BANK")

FROM:     CANARGO ENERGY CORPORATION (the "DEBTOR");

AND FROM: INGALLS & SNYDER LLC (the "SECURITY AGENT")

1.       We hereby give you notice that, pursuant to a security interest
         agreement dated July 2005 (the "SECURITY INTEREST Agreement") made
         between the Security Agent, the Secured Parties and the Debtor, the
         Debtor has assigned to the Security Agent title to a bank account in
         the Debtor's name with you, accounts numbered 011-660859-360 and
         011-660859-202 and any sub-account or substituted account (the
         "ACCOUNTS"), including all interest accrued or accruing in the future
         thereon and any monies of the Debtor (however described, designated or
         numbered) which derive in whole or part from the Accounts or from any
         sum standing to the credit of the Accounts, and the beneficial interest
         and all other rights of the Debtor therein.

2.       We irrevocably and unconditionally authorise and instruct you
         (notwithstanding any previous instructions of any kind which the Debtor
         may have given to you):

         (a)      to disclose to the Security Agent such information relating to
                  the Accounts as it may from time to time require;

         (b)      with effect from the time the Security Agent gives written
                  notice to you that an Event of Default for the purpose of the
                  Security Agreement has occurred:

                  (i)      to hold the Accounts and all monies comprised therein
                           to the order of the Security Agent; and

                  (ii)     to release and deliver the monies held by you from
                           time to time in the Accounts to the Security Agent or
                           to the Security Agent's order and to comply with the
                           Security Agent's instructions generally without any
                           enquiry by you as to the justification or validity of
                           such instructions;


                                       23
<PAGE>


                  (iii)    that until such time as you have received a notice
                           from the Security Agent referred to in this paragraph
                           (b), you shall be permitted and authorised to act in
                           accordance with all proper instructions pursuant to
                           the existing mandates held by you in respect of the
                           Accounts;

         (c)      the Security Agent shall, from time to time, provide you with
                  a list of authorised signatories and specimen signatures for
                  the purpose of the communication of instructions, notices or
                  directions by the Security Agent as set out above.

3.       This notice may be executed in any number of counterparts and by each
         party on a separate counterpart each of which counterparts when so
         executed and delivered shall be an original but all such counterparts
         shall together constitute one and the same instrument.

This notice shall be governed by the laws of the Island of Guernsey.

Date:    [date]



For and on behalf of
CANARGO ENERGY CORPORATION




For and on behalf of
INGALLS & SNYDER LLC



                                       24
<PAGE>


                                   SCHEDULE 2


                    EXTRACTS FROM THE NOTE PURCHASE AGREEMENT

SECTION 9.6       CHANGE IN CONTROL

                  (a)      NOTICE OF CHANGE IN CONTROL OR CONTROL EVENT. CanArgo
                           Energy Corporation will, within five Business Days
                           after any Responsible Officer has actual and not
                           constructive knowledge of the occurrence of any
                           Change in Control or Control Event, give written
                           notice of such Change in Control or Control Event to
                           each holder of Notes unless notice in respect of such
                           Change in Control (or the Change in Control
                           contemplated by such Control Event) shall have been
                           given pursuant to subparagraph (b) of this Section
                           9.6. If a Change in Control has occurred, such notice
                           shall contain and constitute an offer to prepay Notes
                           as described in Section 9.6(c) and shall be
                           accompanied by the certificate described in Section
                           9.6(f).

                  (b)      CONDITION TO COMPANY ACTION. CanArgo Energy
                           Corporation will not take any action that consummates
                           or finalises a Change in Control unless: (i) at least
                           15 Business Days prior to such action it shall have
                           given to each holder of Notes written notice
                           containing and constituting an offer to prepay Notes
                           as described in Section 9.6(c) accompanied by the
                           certificate described in Section 9.6(f), and (ii)
                           contemporaneously with the action taken to consummate
                           or finalise any such Change in Control, it prepays
                           all Notes required to be prepaid in accordance with
                           this Section 9.6.

                  (c)      OFFER TO PREPAY NOTES. The offer to prepay Notes
                           contemplated by subparagraphs (a) and (b) of this
                           Section 9.6 shall be an offer to prepay, in
                           accordance with and subject to this Section 9.6 all,
                           but not less than all, the Notes held by each holder
                           (in this case only, "holder" in respect of any Note
                           registered in the name of a nominee for a disclosed
                           beneficial owner shall mean such beneficial owner) on
                           a date specified in such offer (the "Proposed
                           Prepayment Date"). If such Proposed Prepayment Date
                           is in connection with an offer contemplated by
                           subparagraph (a) of this Section 9.6, such date shall
                           be not less than 30 days and not more than 90 days
                           after the date of such offer (if the Proposed
                           Prepayment Date shall not be specified in such offer,
                           the Proposed Prepayment Date shall be the 30th day
                           after the date of such offer).

                  (d)      ACCEPTANCE. A Purchaser may accept the offer to
                           prepay made pursuant to this Section 9.6 by causing
                           notice of such acceptance to be delivered to CanArgo
                           Energy Corporation at least 15 days prior to the
                           Proposed Payment Date. A failure by a Purchaser to
                           respond to an offer to prepay made pursuant to this
                           Section 9.6 shall be deemed to constitute an
                           acceptance of such offer by such Purchaser.


                                       25
<PAGE>


                  (e)      PREPAYMENT. Prepayment of the Notes to be prepaid
                           pursuant to this Section 9.6 shall be the Redemption
                           Price of such Notes, together with interest on such
                           Notes accrued to the date of prepayment. The
                           prepayment shall be made on the Proposed Prepayment
                           Date.

                  (f)      OFFICER'S CERTIFICATE. Each offer to prepay the Notes
                           pursuant to this Section 9.6 shall be accompanied by
                           a certificate, executed by a Senior Financial Officer
                           of CanArgo Energy Corporation and dated the date of
                           such offer, specifying: (i) the Proposed Prepayment
                           Date; (ii) that such offer is made pursuant to this
                           Section 9.6; (iii) the principal amount of each Note
                           offered to be prepaid; (iv) the interest that would
                           be due on each Note offered to be prepaid, accrued to
                           the Proposed Prepayment Date; (v) that the conditions
                           of this Section 9.6 have been fulfilled; and (vi) in
                           reasonable detail, the nature and date or proposed
                           date of the Change of Control.

                  (g)      EFFECT ON REQUIRED PAYMENTS. The amount of each
                           payment of the principal of the Notes made pursuant
                           to this Section 9.6 shall be applied against and
                           reduce each of the then remaining principal payments
                           due pursuant to Section 9.6 by a percentage equal to
                           the aggregate principal amount of the Notes so paid
                           divided by the aggregate principal amount of the
                           Notes outstanding immediately prior to such payment.

                  (h)      "CHANGE IN CONTROL" DEFINED. "Change in Control"
                           means (a) CanArgo Energy Corporation shall at any
                           time cease to be a publicly held company or cease to
                           have its capital stock traded on an exchange; or (b)
                           a transaction or series of related transactions
                           pursuant to which: (i) at least fifty-one percent
                           (51%) of the outstanding shares of Common Stock of
                           CanArgo Energy Corporation or, on a fully diluted
                           basis, shall subsequent to the date of the Note
                           Purchase Agreement be owned by any Person (as
                           hereinafter defined) which is not related to or
                           Affiliated with CanArgo Energy Corporation; (ii)
                           CanArgo Energy Corporation merges into or with,
                           consolidates with or effects any plan of share
                           exchange or other combination with any Person which
                           is not related to or Affiliated with CanArgo Energy
                           Corporation, or (iii) CanArgo Energy Corporation
                           disposes of all or substantially all of its assets
                           other than in the ordinary course of business.

                  (i)      "CONTROL EVENT" DEFINED. "Control Event" means:

                           (i)      the execution of any CanArgo Group Member of
                                    any agreement or letter of intent with
                                    respect to any proposed transaction or event
                                    or series of transactions or events which,
                                    individually or in the aggregate, may
                                    reasonably be expected to result in a Change
                                    in Control, or

                           (ii)     the execution of any written agreement
                                    which, when fully performed by the parties
                                    thereto, would result in a Change in
                                    Control.


                                       26
<PAGE>


SECTION 10.11     TERMINATION OF CORNELL FACILITIES.

                  Within ten Business days after the Closing, CanArgo Energy
                  Corporation shall deliver to Purchasers: (a) reasonably
                  satisfactory evidence of the payment of all CanArgo Energy
                  Corporation's obligations under the Cornell Facility and any
                  other agreements relating to or arising out of the Cornell
                  Facility by the payment of the Cornell Facility in full and in
                  cash with the proceeds from the issuance of the Notes; and (b)
                  a copy of the notice of termination delivered under the
                  Cornell Facility.

SECTION 11.2      MERGER, CONSOLIDATION, ETC.

                  CanArgo Energy Corporation will not, and will not permit any
                  other CanArgo Group Member to, consolidate with or merge with
                  any other corporation or convey, transfer or lease
                  substantially all of its assets in a single transaction or
                  series of transactions to any Person (except that a Material
                  Subsidiary of CanArgo Energy Corporation may: (x) consolidate
                  with or merge with, or convey, transfer or lease substantially
                  all of its assets in a single transaction or series of
                  transactions to, another Material Subsidiary or CanArgo Energy
                  Corporation; and (y) convey, transfer or lease all of its
                  assets in compliance with the provisions of Section 11.8
                  provided immediately after giving effect to such transaction,
                  no Default or Event of Default shall have occurred and be
                  continuing).

SECTION 11.3      LIENS.

                  CanArgo Energy Corporation will not, and will not permit any
                  other CanArgo Group Member to, directly or indirectly create,
                  incur, assume or permit to exist (upon the happening of a
                  contingency or otherwise) any Lien on or with respect to any
                  property or asset (including, without limitation, any document
                  or instrument in respect of goods or accounts receivable) of
                  CanArgo Energy Corporation or any such other CanArgo Group
                  Member, whether now owned or held or hereafter acquired, or
                  any income or profits therefrom, or assign or otherwise convey
                  any right to receive income or profits, except:

                  (a)      Liens for taxes, assessments or other governmental
                           charges or levies the payment of which is not at the
                           time required by Section 10.4;

                  (b)      statutory Liens of landlords, Governmental
                           Authorities and Liens of carriers, operators,
                           vendors, equipment lessors, warehousemen, mechanics,
                           repairmen, suppliers, workers, construction
                           materialmen and other similar Liens and other like
                           Liens incident of the exploration, development,
                           operation and maintenance of oil and gas properties,
                           in each case, incurred in the ordinary course of
                           business for sums not yet due or the payment of which
                           is not at the time required by Section 10.4;

                  (c)      Liens (other than any Lien imposed by ERISA) incurred
                           or deposits made in the ordinary course of business:
                           (i) in connection with workers' compensation,
                           unemployment insurance and other types of


                                       27
<PAGE>


                           social security or retirement benefits, or (ii) to
                           secure (or to obtain letters of credit that secure)
                           the performance of tenders, statutory obligations,
                           surety bonds, appeal bonds, bids, trade contracts,
                           leases (other than Capital Leases), government
                           contracts, performance bonds, purchase construction
                           or sales contracts, regulatory obligations and other
                           similar obligations, in each case not incurred or
                           made in connection with the borrowing of money, the
                           obtaining of advances or credit or the payment of the
                           deferred purchase price of the property;

                  (d)      any attachment or judgment Lien, not giving rise to
                           an Event of Default;

                  (e)      leases or subleases granted to others, easements,
                           reservations, servitudes, permits, conditions,
                           covenants, exceptions, rights-of-way, restrictions
                           and other similar charges or encumbrances, in each
                           case incidental to, and not interfering with, the
                           ordinary conduct of the business of CanArgo Energy
                           Corporation or any of its Subsidiaries, provided that
                           such Liens do not, in the aggregate, materially
                           detract from value of such property;

                  (f)      any Lien created to secure all or any part of the
                           purchase price, or to secure Indebtedness incurred or
                           assumed to pay all or any part of the purchase price
                           or cost of construction, of property (or any
                           improvement thereon) acquired or constructed by
                           CanArgo Energy Corporation or any other CanArgo Group
                           Member after the date of the Closing, provided that:

                           (i)      any such Lien shall extend solely to the
                                    item or items of such property (or
                                    improvement thereon) so acquired, leased or
                                    constructed and, if required by the terms of
                                    the instrument originally creating such
                                    Lien, other property (or improvement
                                    thereon) which is an improvement to or is
                                    acquired for specific use in connection with
                                    such acquired, leased or constructed
                                    property (or improvement thereon) or which
                                    is real property being improved by such
                                    acquired, leased or constructed property (or
                                    improvement thereon),

                           (ii)     the principal amount of the Indebtedness
                                    secured by any such Lien shall at no time
                                    exceed an amount equal to 80% (but 100% in
                                    the case of property (or improvement
                                    thereon) the acquisition of which is
                                    financed through a Capital Lease Obligation)
                                    of the lesser of: (A) the cost to CanArgo
                                    Energy Corporation or such other CanArgo
                                    Group Member of the property (or improvement
                                    thereon) so acquired or constructed; and (B)
                                    the Fair Market Value (as determined in good
                                    faith by the board of directors of CanArgo
                                    Energy Corporation) of such property (or
                                    improvement thereon) at the time of such
                                    acquisition or construction,


                                       28
<PAGE>


                           (iii)    any such Lien shall be created
                                    contemporaneously with, or within 180 days
                                    after, the acquisition, lease or
                                    construction of such property;

                  (g)      Liens securing Indebtedness arising under the Loan
                           Documents;

                  (h)      contractual Liens which arise in the ordinary course
                           of business under and pursuant to the terms of the
                           Basic Documents or other concessions agreements,
                           production sharing agreements and contracts; joint
                           venture, exploration, limited or general partnership,
                           dry hole, bottom hole, acreage contribution, purchase
                           and acquisition agreements; exploration, production
                           and development licenses; operating agreements;
                           drilling agreements; oil and gas leases; farm-out and
                           farm-in agreements; division orders; contracts for
                           the sale, transportation or exchange of oil and
                           natural gas; unitization and pooling declarations and
                           agreements; area of mutual interest agreements;
                           overriding and net profits royalty agreements;
                           marketing agreements; processing agreements;
                           development agreements; gas balancing or deferred
                           production agreements; injection, repressuring and
                           recycling agreements; salt water or other disposal
                           agreements; seismic or other geophysical permits or
                           agreements, and other agreements which are usual and
                           customary in the oil and gas business and are for
                           claims which are not delinquent or which are being
                           contested in good faith by appropriate action and for
                           which adequate reserves have been maintained in
                           accordance with applicable GAAP, provided that any
                           such Lien referred to in this clause does not
                           materially impair the use of the property covered by
                           such Lien for the purposes for which such property is
                           held by CanArgo Energy Corporation or any other
                           CanArgo Group Member or materially impair the value
                           of such property subject thereto;

                  (i)      Liens arising solely by virtue of any statutory or
                           common law provision relating to banker's liens,
                           rights of set-off or similar rights and remedies and
                           burdening only deposit accounts or other funds
                           maintained with a creditor depository institution,
                           provided that no such deposit account is a dedicated
                           cash collateral account or is subject to restrictions
                           against access by the depositor in excess of those
                           set forth by regulations promulgated by the Board of
                           Governors of the Federal Reserve System of the United
                           States of America (or any successor Governmental
                           Authority) or other Governmental Authority and no
                           such deposit account is intended by CanArgo Energy
                           Corporation or any other CanArgo Group Member to
                           provide collateral to the depository institution,
                           except in each such case in connection with letter of
                           credit obligations issued pursuant to or in
                           connection with any Basic Documents or other
                           agreements referred to in clause (h);

                  (j)      Other Liens not described in clauses (a) to (i) of
                           this Section on the property of CanArgo Energy
                           Corporation or any Subsidiary in an aggregate amount
                           at any time not exceeding US$100,000; and

                  (k)      Permitted Encumbrances


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<PAGE>


SECTION 11.4      PRIORITY

                  CanArgo Energy Corporation shall not, without the consent of
                  the Required Holders issue any Indebtedness with priority
                  over, or pari passu with, the Notes.

SECTION 11.6      RESTRICTED PAYMENTS.

                  CanArgo Energy Corporation will not make any Restricted
                  Payments, except: (a) CanArgo Energy Corporation may declare
                  and pay (i) dividends with respect to its Equity Interests
                  payable solely in additional shares of its Equity Interests or
                  Indebtedness and (ii) interest and principal on Indebtedness
                  owed by CanArgo Energy Corporation to another CanArgo Group
                  Member in either case which does not contravene the provisions
                  of the Note Purchase Agreement, and (b) CanArgo Energy
                  Corporation may make distributions pursuant to and in
                  accordance with stock incentive plans or other Plans for
                  management or employees of CanArgo Energy Corporation and its
                  Subsidiaries.

SECTION 11.7      SALE-AND-LEASEBACKS.

                  CanArgo Energy Corporation will not, and will not permit any
                  of its Subsidiaries to, enter into any Sale-and-Leaseback
                  Transaction.

SECTION 11.8      SALE OF ASSETS, ETC.

                  (1)      SALE OF ASSETS ETC. CanArgo Energy Corporation will
                           not, and will not permit any other CanArgo Group
                           Members to, make any Transfer, provided that the
                           foregoing restriction does not apply to a Transfer
                           if:

                           (a)      the property that is the subject of such
                                    Transfer constitutes either: (i) inventory
                                    held for sale (including the sale of
                                    Hydrocarbons in the ordinary course of
                                    business, including, without limitation,
                                    pursuant to advance sale contracts, forward
                                    contracts and production payments), (ii)
                                    abandonments, assignments, leases, subleases
                                    or farm-outs of oil and gas properties or
                                    dispositions of properties pursuant to
                                    operating agreements or other forms of
                                    exploration and development agreements or
                                    option agreements; or (iii) property,
                                    equipment, fixtures, supplies or materials
                                    no longer required in the operation of the
                                    business of CanArgo Energy Corporation or
                                    such Subsidiary or that is redundant,
                                    condemned, obsolete, and, in the case of any
                                    Transfer described in clauses (i) through
                                    (iii), such Transfer is in the ordinary
                                    course of business (an "Ordinary Course
                                    Transfer"); or


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<PAGE>


                           (b)      either:

                                    (i)      such Transfer is from a CanArgo
                                             Group Member to CanArgo Energy
                                             Corporation; or

                                    (ii)     such Transfer is from CanArgo
                                             Energy Corporation to a CanArgo
                                             Group Member or from a CanArgo
                                             Group Member to another CanArgo
                                             Group Member and in either case is
                                             for Fair Market Value,

                           so long as immediately before and immediately after
                           the consummation of such transaction, and after
                           giving effect thereto, no Default or Event of Default
                           exists or would exist (each such Transfer, an
                           "Intergroup Transfer"); or

                  (c)      such Transfer involves oil and gas properties or
                           interests therein that are exchanged for other oil
                           and gas properties or interests therein in arms
                           length transactions or such Transfer is pursuant to a
                           Permitted Farmout Arrangement.

                  (2)      DISPOSAL OF OWNERSHIP OF A CANARGO GROUP MEMBER.
                           CanArgo Energy Corporation will not, and will not
                           permit any CanArgo Group Members to, sell or
                           otherwise dispose of any shares of Subsidiary Stock,
                           nor will CanArgo Energy Corporation permit any such
                           CanArgo Group Member to issue, sell or otherwise
                           dispose of any shares of its own Subsidiary Stock,
                           provided that the foregoing restrictions do not apply
                           to:

                           (a)      the issue of directors' qualifying shares by
                                    any such Material Subsidiary;

                           (b)      any such Transfer of Material Subsidiary
                                    Stock constituting an Intergroup Transfer;

                           (c)      any such Transfer of Material Subsidiary
                                    Stock by a nominee holder as required
                                    pursuant to the terms of a Pledge Agreement;

                           (d)      any issuance of shares of Subsidiary Stock
                                    by a Material Subsidiary that qualifies as a
                                    Permitted Farmout Arrangement; and

                           (e)      the disposition or dissolution of any
                                    Subsidiary that is not a Material
                                    Subsidiary; provided that the proceeds of
                                    such disposition or assets of the Subsidiary
                                    are transferred to another CanArgo Group
                                    Member and immediately before and
                                    immediately after the consummation of such
                                    transaction, and after giving effect
                                    thereto, no Default or Event of Default
                                    exists or would exist.


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<PAGE>


SECTION 11.9      FUTURE INDEBTEDNESS.

                  Without the prior written consent of the Required Holders,
                  which consent shall not be unreasonably withheld, conditioned
                  or delayed, CanArgo Energy Corporation will not incur any
                  Indebtedness after the date of the Note Purchase Agreement
                  other than: (a) Indebtedness outstanding under the Notes; (b)
                  any additional unsecured Indebtedness, the aggregate amount
                  outstanding thereunder at any time shall not exceed
                  US$1,250,000; (c) unsecured Indebtedness of CanArgo Energy
                  Corporation to another CanArgo Group Member or unsecured
                  Indebtedness of a CanArgo Group Member or direct or indirect
                  Subsidiary of CanArgo Energy Corporation to another CanArgo
                  Group Member; and (d) Indebtedness of a CanArgo Group Member
                  to a direct or indirect Subsidiary of CanArgo Energy
                  Corporation that is not a Material Subsidiary, provided that
                  the aggregate amount outstanding thereunder at any time shall
                  not exceed US$1,000,000. In considering whether to give its
                  consent to any future Indebtedness, the Required Holders shall
                  be entitled to take into consideration, inter alia, the
                  potential effects of any such proposed Indebtedness upon the
                  financial condition and wherewithal of CanArgo Energy
                  Corporation and/or upon their rights under the Loan Documents,
                  and any decision by the Required Holders to withhold their
                  consent to any such proposed future Indebtedness shall be
                  final and binding absent a showing of manifest bad faith.

SECTION 11.10     BASIC DOCUMENTS.

                  CanArgo Energy Corporation shall not and shall not permit any
                  other CanArgo Group Member, without the prior written consent
                  of the Required Holders to (i) cancel or terminate any Basic
                  Agreement to which CanArgo Energy Corporation or other CanArgo
                  Group Members are a party or consent to or accept any
                  cancellation or termination thereof prior to the scheduled
                  expiration thereof; (ii) sell, assign (other than pursuant to
                  the Security Documents or a Permitted Farmout Arrangement) or
                  otherwise dispose of (by operation of law or otherwise) any
                  part of its interest in any Basic Agreements; (iii) waive any
                  default under or breach of any provision of any Basic
                  Agreement to which CanArgo Energy Corporation or any of its
                  Subsidiaries are a party, or waive, fail to enforce, forgive,
                  compromise, settle, adjust or release any Material right,
                  interest or entitlement, howsoever arising, under, or in
                  respect thereof; or (iv) amend, supplement, modify or in any
                  way vary in any respect or agree to any variation of any
                  provision of any Basic Agreement to which CanArgo Energy
                  Corporation or any other CanArgo Group Members are a party, or
                  of the performance of any Material covenant or obligation by
                  any other Person under any Basic Agreement, except any
                  amendment, supplement, modification or variation of the Basic
                  Agreements as a result of the transfer by (x) NOC (Cyprus)'s
                  interest in the Ninotsminda PSC (as defined in Schedule 6.19)
                  to NOC (Jersey) and (y) CNL (Cyprus)'s interest in the Norio
                  PSC and Tbilisi PSC (both as defined in Schedule 6.19) to CNL
                  (Jersey).


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<PAGE>


SECTION 11.11     ANTI-TAKEOVER DEFENSE.

         (a)      Except has hereinafter specifically provided, so long as any
                  Indebtedness under any of the Notes is outstanding, CanArgo
                  Energy Corporation shall not enter into or adopt any
                  anti-takeover defense, "poison pill", shareholder rights plan
                  or any other device designed to prevent a takeover, hostile or
                  otherwise, that could encumber, restrict or affect Ingalls &
                  Snyder LLC, Robert L Gipson, Thomas O Boucher, and/or Ingalls
                  & Snyder Value Partners LP to acquire any Equity Interests of
                  CanArgo Energy Corporation;

         (b)      Notwithstanding the provisions of Section 11.11(a) to the
                  contrary provided, CanArgo Energy Corporation may enter into
                  or adopt an anti-takeover defense, "poison pill", shareholder
                  rights plan or any other device designed to prevent Ingalls &
                  Snyder LLC, Robert L Gipson, Thomas O Boucher , and/or Ingalls
                  & Snyder Value Partners L.P. or other Note holders to acquire
                  such Equity Interests by means of or in connection with the
                  direct or indirect forbearance, cancellation or exchange of
                  all or any part of the Indebtedness evidenced by the Notes;

         (c)      Notwithstanding the provisions of Section 11.11(a) to the
                  contrary provided, Ingalls & Snyder Value Partners L.P. hereby
                  agrees that so long as any Notes are outstanding and no Event
                  of Default exists and is continuing and until the expiration
                  of the second anniversary after the indefeasible satisfaction
                  of all Indebtedness under the Notes, whether by payment,
                  conversion, exchange or otherwise (other than in connection
                  with any proceeding under the United States Bankruptcy Code),
                  Ingalls & Snyder Value Partners L.P. shall not, without the
                  express written consent or approval of the incumbent Board of
                  Directors of CanArgo Energy Corporation, solicit or otherwise
                  seek to effect or participate in a Change of Control of
                  CanArgo Energy Corporation or a change in the composition of
                  the incumbent Board of Directors by means of the purchase or
                  offer to purchase of any Equity Interests of CanArgo Energy
                  Corporation, the solicitation of proxies or written consents,
                  or by voting any Equity Interests acquired by Ingalls & Snyder
                  Value Partners L.P. upon the conversion of Notes pursuant to
                  Section 10.7, in connection with any solicitation of proxies
                  or written consents or at any regular or special meeting of
                  shareholders or otherwise.

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